It’s an all too common occurrence: During the administration of a decedent’s estate, it becomes apparent that the decedent completed a beneficiary designation on a sizable retirement plan in a mistaken or totally misguided fashion. In many of these instances, the decedent named a trust as the beneficiary of the plan. In other instances, the decedent named no beneficiary at all. While the realization of a botched beneficiary designation is most certainly unwelcome, all hope isn’t lost.
The Internal Revenue Service has issued countless private letter rulings addressing whether a surviving spouse is entitled to roll over retirement assets inherited through an estate or trust.1 The IRS has also issued numerous PLRs analyzing whether the beneficiaries of a trust may be treated as “designated beneficiaries” within the meaning of Internal Revenue Code Section 401(a)(9)(E). Over the past year, the IRS has made multiple additions to this long line of rulings.
By and large, these recent PLRs, like the ones that came before them, are taxpayer friendly, and several of these PLRs highlight post-mortem planning opportunities available to taxpayers seeking the spousal or non-spousal rollover of plan proceeds received from a decedent.
IRA Payable to Estate
In a recent PLR, the IRS determined that an individual retirement account payable to a decedent’s estate qualified for spousal rollover treatment.2 In PLR 201839005 (June 25, 2018), the decedent died intestate and without designating a beneficiary on his IRA.3 According to the terms of the plan, because no beneficiary was named, the IRA was payable to the decedent’s estate.4 Pursuant to applicable state law, the decedent’s estate would be distributed among the decedent’s surviving spouse and children; however, the decedent’s children executed qualified disclaimers of their interest in the decedent’s estate.5 The surviving spouse desired to distribute the plan to the estate and to roll the distribution into an IRA in the surviving spouse’s individual name within 60 days of the distribution date, and the surviving spouse sought a PLR on the income tax consequences of the proposed transaction.6
In this PLR, the IRS concluded that the children’s disclaimers resulted in the surviving spouse being the only beneficiary of the estate, thus making the surviving spouse the only beneficiary of the plan.7 The IRS further ruled that, because the amount distributed from the plan would be rolled over into an IRA plan in the name of the surviving spouse within 60 days of the distribution, the distribution would be excluded from the spouse’s income under IRC Section 402(c)(1).8
Interestingly, this PLR doesn’t specify whether the decedent’s children had any children of their own. Presumably not, otherwise those children would have likely stepped into their parents’ shoes as heirs of the decedent. While the use of disclaimers for the purpose of making a surviving spouse the sole beneficiary of a plan will be relatively straightforward when the plan participant has a small, adult nuclear family, this type of planning has the potential to get complicated quickly when the plan participant has multiple generations of living descendants. Further, if the plan participant has minor or disabled descendants in any generation, representation and potential conflict-of-interest issues abound.
IRA Payable to Trust
More good news for taxpayers came by way of PLR 201901005.9 In this ruling, the IRS determined that an IRA payable to a decedent’s trust qualified for spousal rollover treatment.
The decedent was survived by a surviving spouse, one child and two grandchildren. The decedent named a trust as the beneficiary of an IRA with no contingent beneficiary.10 The trustee of the trust executed a qualified disclaimer of the trust’s interest in the plan. Thereafter, the decedent’s child and grandchildren also executed qualified disclaimers of their interests in the plan.11 Again, the IRS ruled that the surviving spouse was permitted to make a spousal rollover.12
The PLR doesn’t include any details regarding the identity of the trust beneficiaries, nor does the ruling address the authority of the trustee to make the disclaimer. In Revenue Ruling 90-110, the IRS noted that it’s virtually the law in every jurisdiction that a trustee can’t make a unilateral disclaimer that affects the rights of the beneficiaries unless the trustee receives the beneficiaries’ consent or the disclaimer is authorized by the trust instrument.13 Rev. Rul. 90-110 stands for the proposition that a disclaimer by a fiduciary can be “qualified” only to the extent it meets the requirements of IRC Section 2518 and the trustee isn’t otherwise exceeding his authority to make such disclaimer.14 In practice, a disclaimer by a trustee will raise questions not only about the trustee’s authority to disclaim but also about whether the disclaimer comports with the fiduciary duties that the trustee owes to the trust beneficiaries.
Trust as Beneficiary
Another recent ruling, PLR 201840007, demonstrates how multiple post-mortem steps can be taken to achieve a non-spousal rollover to an inherited IRA when a trust is named as the beneficiary of the plan.15
In this ruling, the decedent was the settlor of an irrevocable trust that was named as the beneficiary of the decedent’s IRA.16 Under the terms of the trust, at the decedent’s death, the trust was divided into shares for the decedent’s children.17 The trustee, pursuant to a discretionary power granted under the terms of the trust instrument, severed each share into a mandatory and discretionary share. Under the terms of the original trust instrument, each beneficiary was granted a limited testamentary power of appointment (POA) over his discretionary trust share to any person, charitable organization or combination thereof.18 In the event the POA wasn’t exercised, the trust would distribute to the beneficiary’s lineal descendants, per stirpes, or, if none, to the lineal descendants of the beneficiary’s nearest ancestor who was a descendant of the decedent settlor.19 The PLR specified that none of the decedent’s children had any living descendants at the time of the decedent’s death.20
On Sept. 30 of the year following the decedent’s death, each trust beneficiary executed an “Irrevocable Partial Release Power of Appointment,” which purported to release each beneficiary’s limited testamentary POA over any portion of his discretionary trust share to any person younger than the oldest beneficiary of the trust.21
In the IRS’ analysis, it first explained that a rollover to an inherited IRA is only permissible to the extent the decedent’s trust and each separate share thereof is a see-through trust within the meaning set forth in Treasury Regulations Section 1.401(a)(9)-4 Q&A-5.22 To qualify as a see-through trust, all of the trust beneficiaries who could possibly receive distributions must be identifiable individuals as of Sept. 30 of the year following the decedent’s year of death.23 Because the “Irrevocable Partial Release Power of Appointment” executed by the beneficiaries removed all potential appointees other than individuals younger than the decedent’s oldest child, the IRS ruled that the decedent’s oldest child could be identified as the trust’s oldest beneficiary and, thus, such child was the measuring life.24
This PLR is yet another illustration of how practitioners may use post-mortem maneuvering (and in this case, multiple levels of post-mortem maneuvering) to achieve a rollover of plan proceeds to an inherited IRA.
Endnotes
1. These private letter rulings span nearly two decades. See, e.g., PLR 200324059 (March 18, 2003); PLR 200635065 (April 7, 2006); PLR 200637033 (June 20, 2006); PLR 201423043 (Feb. 15, 2014); PLR 201511036 (Dec. 18, 2014); PLR 201507040 (Dec. 24, 2014); and PLR 201821008 (Feb. 22, 2018).
2. PLR 201839005 (June 25, 2018).
3. Ibid.
4. Ibid.
5. Ibid.
6. Ibid.
7. Ibid.
8. Internal Revenue Code Section 402(c) provides that, if any portion of an eligible rollover distribution from a qualified trust is transferred into an eligible retirement plan, the portion of the distribution so transferred shall not be includible in the gross income.
9. PLR 201901005 (Oct. 10, 2018).
10. Ibid.
11. Ibid.
12. Ibid.
13. Revenue Ruling 90-110.
14. Ibid.
15. PLR 201840007 (July 9, 2018).
16. Ibid.
17. Ibid.
18. Ibid.
19. Ibid.
20. Ibid.
21. Ibid.
22. Ibid.
23. Ibid. (citing Treas. Regs. Section 1.401(a)(9)-4, Q&A 4).
24. See supra note 15.