The IRS has issued a private letter ruling approving a surviving spouse’s rollover of her husband’s 401(k) plan account to a spousal IRA. The couple had established a dual settlor living trust of the kind often used for estate planning. At the death of the first spouse, the trust would divide into a marital trust and a residuary trust. The facts stated in the ruling do not mention an exemption trust, but the presence or absence of that trust was not relevant to the ruling. Following the first death, the surviving spouse became the sole trustee, and the marital trust provided that all income was to be paid to the surviving spouse. In addition, the trustee (the surviving spouse) had total discretion to distribute principal of the marital trust to himself or herself, as well as complete discretion in dividing the trust estate between the marital trust and the residuary trust.

In this case, upon the death of the husband, the balance of his Section 401(k) plan account was paid to the trust as beneficiary. The wife, now the sole trustee, allocated the account balance to the marital trust and thereafter exercised her discretion as trustee to distribute the proceeds of the 401(k) account to herself. 

She then wished to roll the 401(k) account proceeds into a spousal IRA. IRC Section 402(c)(9) provides that if a retirement plan benefit is paid to the surviving spouse of the plan participant, it is treated for rollover purposes as though the spouse had been the employee under the plan. This is beneficial because it would allow the surviving spouse to roll the proceeds into her own IRA and take required minimum distributions based on her own age instead of the more rapid distribution scheme that is imposed on inherited IRAs.

She probably applied to the IRS for a private ruling because the 401(k) account proceeds came to her by way of the marital trust rather than directly from the 401(k) plan. In PLR 201523019, the IRS ruled that because the wife was the sole trustee of the trust and had complete discretion to transfer the account proceeds to the marital trust and then to distribute these proceeds to herself from there, she should be treated as though she received the account balance directly from the plan. Therefore, under IRC Section 402(c)(9), the proceeds could be rolled into her own IRA.