What You Need to Know
- Retirement and estate planning specialists warn clients not to name estates as IRA beneficiaries.
- Naming an estate as the beneficiary can lead to complicated tax issues.
- In the case of Taxpayer B, things worked out.
The Internal Revenue Service has helped a surviving spouse cut through a complicated IRA tax knot.
Spouse A set up IRA X, and named an estate as the IRA X beneficiary. Taxpayer B was the administrator of the estate and the only beneficiary of the estate.
When Spouse A died, Taxpayer B wanted to take control of the IRA X assets without paying big federal income taxes.
Neil Sandhu, an IRS senior technician reviewer, made that happen.
Sandhu told Taxpayer B, in Private Letter Ruling 202210016, that Taxpayer B can roll the IRA X assets into an IRA in Taxpayer B’s name, as long as the rollover occurs within 60 days after the date the IRA proceeds are paid into the estate.
Unless Taxpayer B rolls the cash into a Roth IRA, Taxpayer B “will not be required to include in Taxpayer B’s gross income any portion of the IRA X proceeds timely rolled over,” Sandhu wrote.
The IRS did not give the names of Spouse A, Taxpayer B or the IRA X provider.
The IRS uses private letter rulings to answer taxpayers’ questions about how the IRS believes tax rules should be applied. The IRS directs a private letter ruling only at the taxpayer who asked for it, and the agency emphasizes that federal law “provides that it may not be used or cited as precedent.”
In practice, however, taxpayers and their advisors tend to see a private letter ruling as an indicator of what the IRS is thinking.
When IRA holders name spouses as beneficiaries and die, the spouses can take over the assets without paying income taxes on the amounts received. The spouses can use their own age when complying with IRA required minimum distribution, or RMD, rules.
The Setting Every Community Up for Retirement Enhancement (Secure) Act changed the rules for non-spouses, but not for spouses.
One concern, however, is that the rules governing IRA assets that flow into an estate are different from the rules governing IRA assets that go directly to a spouse. The tax rules generally require an estate to distribute IRA assets in a way that maximizes federal income taxes.
The Letter Ruling
Sandhu wrote in the private letter ruling that, normally, when an IRA holder’s IRA proceeds pass through an estate and then flow to a spouse, “the surviving spouse will be treated as having received the IRA proceeds from the third party.”
That means the surviving spouse is not eligible for a tax-free IRA rollover.
“However, the general rule will not apply in situations in which the decedent’s estate is the beneficiary of a decedent’s IRA proceeds, and the decedent’s surviving spouse is the sole administrator of the estate and the sole beneficiary of the IRA proceeds that pass through the estate,” Sandhu wrote. “Under these circumstances no third party can prevent the surviving spouse from receiving the proceeds of the IRA and from rolling over the proceeds into the surviving spouse’s own IRA.”
In that situation, Sandhu said, the IRA X proceeds flowing into the estate can be treated as if they had flowed directly to Taxpayer B.
What It Means
The real meaning of the private letter ruling is that Taxpayer B had to seek a private letter ruling because Spouse A failed to name Taxpayer B as the IRA X beneficiary.
Financial, estate and retirement planners should make sure that spouse clients understand the kinds of problems that may occur if IRA holders name estates, rather than specific people, as the IRA beneficiaries.
(Photo: Allison Bell/ALM)