spousal rollover complications
IRA owner dies Jan 2009 in his 50’s with beneficiary as his estate.
He dies with no will ( intestate) in NY where law says it’s 50/50 spouse and child ( he left wife and child)
All parties agree spousal roll over is best result
Executors of estate have directed custodian to change IRA to a beneficiary IRA titled “John Smith deceased FBO John Smith Estate”
Background information .. Custodian has said that they would allow a spousal rollover with a “clear” court order to do so and with such a court order would not require a PLR.
Questions and comments:
Since the custodian appears to be cooperative as per conditions stated above might it have been better to not have moved the IRA assets to he beneficiary IRA and just left them in the original IRA account. ? Is there any benefit or purpose served to now have it in a deceased ira knowing full well a spousal rollover is ultimate goal?
Is it normal or likely a probate court in an intestate case would order the IRA to be rolled to spouse
If court order is given and the custodian allows a rollover ( which now has to go from deceased IRA to spouse.. is that the end of the story?
In other words will the fact that the beneficiary was estate and therefore subject to 5 yr rule be over looked by IRS since a court changed the results?
In other words are there essentially 2 masters here one being the court and the other being the IRS and they may have different agendas ?
If the court order accomplishes the rollover what will then be the reporting requirements given the ORIGINAL>>> DECEASED >>> SPOUAL IRA path?
Permalink Submitted by Bruce Steiner on Sun, 2009-06-28 17:41
The administrators might be able to distribute the IRA to the spouse, distribute other assets of equal value to the child, show it in an accounting, and ask the Surrogate’s Court to approve the accounting. But that would probably be more effort than getting a PLR. Also, all it does is get the IRA to the spouse — it doesn’t bless her rolling it over. The Surrogate’s Court has no authority to rule on whether she can roll it over, or the tax consequences of it.
The wife could do a rollover without a PLR and take her chances as to the tax consequences (though the tax consequences won’t be pretty if the IRS says she wasn’t eligible to roll it over). The custodian need not even know the background if the administrators distribute 50% or all of the IRA to her and she withdraws the money and puts the money into a new IRA, or if the administrators withdraw 50% or all of the IRA and distribute the money to her and she puts the money into a new IRA. Of course, in the latter scenario, the income will be reported to her on a Schedule K-1 from the estate rather than on a Form 1099 from the custodian, which may result in the IRS auditing the transaction.
For more on this, see my article in the October 1997 issue of Estate Planning on spousal rollovers where the spouse is not the named beneficiary: http://www.kkwc.com/docs/AR20050125164755.pdf The article is still current — if anything, the IRS is a bit more liberal on this now that it was then.
How much money is involved? What does the family want to do? Who are the administrators? Is a disclaimer by the child feasible? What do the wife’s lawyer and the administrators’ lawyer recommend?
This post is not intended as legal advice. She should consult with tax/estates counsel, who can give her specific advice based on the facts and her objectives and risk tolerance.
Permalink Submitted by Anonymous (not verified) on Sun, 2009-06-28 22:56
My take on this is that there are sufficient PLRs that allow the spouse to receive either all or 50% of the account into her OWN IRA. It may be well worth it get a PLR though.
My experience with a major fund company has been that as along as the excecutor, spouse and child are all on the same page this process can be very easily completed with proper written instructions. For example, if it ends up that the spouse is to receive the whole account (through a disclaimer) some custodians will first transfer (no tax reporting) the account directly from Inherited IRA Estate Tin to an Inherited IRA in the name of the spouse SSN (2 step process). Then the custodian may require written instructions from the spouse, using disclaimer language (protect custodian) and directions to perform a 60-day rollover from the Inherited IRA to the Rollover IRA – tax reporting will show 1099R under SSN out, 5498 under SSN in. Spouse will need to explain this to the IRS.
Permalink Submitted by charles lore on Wed, 2009-07-01 00:58
Thank you both for the input. To answer your questions Bruce it is 200m, administrators are wife and brother , all parties want spousal rollover.
I’m getting the impression its not so easy to get the court to do what is logical and simple which is to use 100% of ira towards the wife’s “cut” which is 50% in NYS intestate law. Am I correct is suspecting all assets will be put in an estate account ( Ira of coarse in a beneficiary ira with estate as beneficiary) and then all is split 50/50.. And further that the child’s representative would disclaim clearing a path to spousal rollover?
This seems a backwards way to go where ira is concerned but I’m not an estate lawyer so Id like your take on this. Also can the mother ( wife) disclaim for child in favor of herself? Conflict?
Lastly would it had been better to have left ira in dead owners original ira account and from there roll it to spouse if custodian allowed the roll ( with court permission)
Permalink Submitted by Bruce Steiner on Wed, 2009-07-01 03:18
How is the brother a co-administrator with the wife? A spouse has priority under Section 1001 of the NY Surrogate’s Court Procedure Act.
As a general rule, the court won’t give the administrators advice as to how to administer the estate. But I think it’s worth exploring your suggestion of distributing the IRA to the spouse as part of her share.
If the IRA is $200,000, it may be worth it to get a private letter ruling, though that’s the client’s decision.
As previously noted, the spouse should consult with tax/estates counsel, who can give her specific advice based on the particular facts and her objectives.
Permalink Submitted by Alan Spross on Wed, 2009-07-01 03:31
Chuck,
I believe there are laws in NYS protecting a minor’s interest in an estate. I recall that even a parent must seek court approval to become the financial guardian of the child’s interest. Therefore, as you indicated, a disclaimer of the child’s interest would probably amount to a violation of some type. Note that Bruce referred to offsetting value transferred to the child in exchange for the IRA interest. I would think that would be a minimum requirement.
With respect to the child’s IRA interest, the child’s RMD requirement will be predicated on the estate beneficiary, and therefore the 5 year rule would apply if owner passed prior to the RBD. Child can never be treated as a designated beneficiary. I don’t know that the IRA status has any bearing on whether the spouse can eventually do a rollover, since a spousal rollover can be done at anytime from an inherited IRA, but in this case that would depend on the prior letter rulings allowing the spousal rollover after a number of different scenarios.
Permalink Submitted by Bruce Steiner on Wed, 2009-07-01 12:51
Alan is correct. In New York, a disclaimer for a minor requires (i) the appointment of a guardian (such as a parent) for the minor, and (ii) court approval. A court is extremely unlikely to approve a disclaimer for a minor in a case like this where the minor would be giving something up. (A common example of a disclaimer for a minor that a court will approve is where a child wants to disclaim, but the child has a minor grandchild, and the child won’t disclaim if the court doesn’t allow a disclaimer for the minor grandchild, so the grandchild isn’t giving up anything.)
It’s time for the wife to consult with a lawyer on this.
Permalink Submitted by charles lore on Wed, 2009-07-01 13:00
Bruce maybe I’m not understanding what is meant by “administator” in this case. The brother is really acting in an advisory capacity since he is an attorny ( not an estate attorney)
Permalink Submitted by Bruce Steiner on Wed, 2009-07-01 13:15
An administrator is essentially equivalent to an executor. Where there is a Will, the executor is usually the person the testator named in the Will to be the executor. Where there is no Will, the statute specifies who, and in what order, is entitled to become the administrator. In New York (and probably in most states), if there is a surviving spouse, the surviving spouse generally has first priority to become the administrator. In New York, the order of priority is (i) spouse, (ii) children, (iii) grandchildren, (iv) parents, (v) siblings, and (vi) anyone else who shares in the estate. Since the spouse has first priority, if she wants the brother (who is eligible to serve, though in a lower priority) as co-adminstrator, the court can (and likely would) appoint the brother as co-administrator.