In this PLR, the IRS found that the Decedent’s surviving spouse was not treated as the payee of the Decedent’s IRA, and therefore she could not take the IRA and roll it over into an IRA in her own name.
The Decedent died in 2004 survived by his wife and son. The Decedent named a trust as the beneficiary of his IRA. The IRA was the only asset of the trust and the Decedent’s wife was named as the sole trustee. The trustee is authorized to pay discretionary income and principal to the Decedent’s wife for her maintenance, support and health. Any income not distributed is to be added to principal. Upon the Decedent’ wife’s death, the remaining principal is to be distributed to the Decedent’s son, if he survives the wife, or, if he predeceases her, to his then living descendents, per stirpes, or, in default thereof, to the Decedent’s nephews and nieces.
After the Decedent’s death, a controversy arose among the Decedent’s wife, son and nieces and nephews. The Decedent’s wife petitioned the state court for a declaratory judgment that she has the discretion, as trustee, to withdraw the balance from the IRA and distribute it to herself, individually, in order for her to rollover the IRA into an IRA in her own name. The court granted the declaratory judgment.
In this ruling request, the Decedent’s wife represented that she will roll the IRA into an IRA in her own name and will then make an irrevocable beneficiary designation consistent with the trust terms on her death.
The IRS noted that “generally, under certain conditions, if either a decedent’s plan or IRA proceeds pass through a third party, e.g., a trust, and then are distributed to the decedent’s surviving spouse who is entitled to receive the distribution, said spouse will be treated as acquiring them directly from the decedent.” In those cases, the spouse could take the distribution and roll it into her own name.
However, the IRS determined that the Decedent’s wife did not have the power to withdraw the entire balance of the IRA either under state law or pursuant to the trust terms because she was limited to distributions subject to an ascertainable standard.
The IRS stated that it is not bound by the state court order because it is not the highest court in the state, and is contrary to prior decisions by the highest court in the state. Accordingly, the court order is not controlling for federal tax purposes, and any withdrawal by the Decedent’s wife of the IRA would be unauthorized for federal tax purposes. In addition, if the remainder beneficiaries agreed with such withdrawal, they may be treated as having made a taxable gift under Section 2501.
In making its ruling, the IRS concluded that (1) the Decedent’s IRA will be considered an inherited IRA, since the beneficiary of the IRA is not the spouse; (2) the Decedent’s wife is not the beneficiary and therefore cannot withdraw the IRA and roll it over into her own name; and (3) any amounts paid out of the IRA to the Decedent’s wife will be taxed to her in the year distributed.
The IRS pointed out that the Decedent’s wife is entitled to so much of the income and principal as determined under the ascertainable standard. If the amount so distributed to her exceeds the minimum required distribution for any year, then she, as the surviving spouse of the Decedent, would be entitled to roll such excess over into her own IRA.