Surviving Spouse Prohibited from Treating IRA as His/Her Own?
We had a question come up regarding a traditional IRA agreement form. The form states, in relevant part, the following:
“Surviving Spouse Election. If the Owner’s designated Beneficiary is his or her surviving spouse, the spouse in accordance with applicable Income Tax Regulations may elect to treat the Account as his or her own IRA. The Trustee will treat the surviving spouse as having made this election if the surviving spouse: (i) advises the Trustee in writing of his or her election to treat the Account as the spouse’s own IRA; (ii) makes an IRA contribution to the Account; (iii) makes a rollover to or from the Account; or (iv) fails to elect timely a payment method available to the spouse under this Section. The surviving spouse will not have an election to treat the Owner’s IRA as his or her own IRA if the Owner, on a form prescribed by the Trustee, has elected to prohibit his or her surviving spouse from treating his or her IRA as his or her own IRA.”
With respect to the bolded language above, has anyone encountered a situation or used a form which allows a traditional IRA owner to prohibit his/her spouse from treating it as their own? That seems to be inconsistent with IRS Publication 590-B (2023), which states that spouses generally have the choice to treat a deceased spouse’s IRA as his/her own.
Permalink Submitted by Alan - IRA critic on Wed, 2024-06-26 15:00
Have never encountered a beneficiary clause like this, but IRA custodians are generally allowed to include their own beneficiary options. But there are some issues with these particular provisions.
The clause is silent with respect to the default rule of the IRS that a sole surviving spouse that fails to complete a beneficiary RMD automatically defaults to ownership status. Perhaps that is what (iv) refers to. Custodians will rarely allow a contribution to be made to a beneficiary IRA, rather they will require the spousal beneficiary to open their own IRA to make a contribution or do a spousal rollover. A surviving spouse should be able to take an inherited IRA distribution and do a 60 day rollover to their own IRA without affecting the status of the inherited IRA. Further, the custodian has no idea if such a distribution is rolled over to an owned IRA with another custodian.
The bolded section offers an option to the IRA owner to restrict the surviving spouse’s ownership elections, but the SS could defeat this by taking a distribution and doing a 60 day rollover to their own IRA, therefore this provision would only result in the loss of convenience of the election but would not stop the spouse from doing a spousal rollover. Perhaps this custodian encountered some unusual demand from IRA owners for this provision to have led to the drafting of a form to accomplish this. I wonder if that form also allows the owner to name an irrevocable successor beneficiary……….
This clause does not reflect the new time limit for ownership election that the IRS included in the Secure Act Regs, but that would also just eliminate the election and the default ownership after the deadline. The SS could still take a distribution and do a rollover however.