Trust as IRA Beneficiary
I am hoping I can get a little direction…I have a client who’s husband died and the beneficiary of his IRA is their AB Trust. The trust clearly has the wife as primary beneficiary. What we believe is that the trust qualifies as a “See-Through” or “Pass-Through” trust and the IRA can then be left to the spouse (who should have been the beneficiary, but somewhere along they way they were given some really bad advice)! The custodian of the IRA is asking for either a PLR or an official “Legal Opinion” before they change the registration to the wife. Does anyone know of a PLR that relates to this circumstance? Or any legal examples that would give us some faith that the IRS would see things our way? I don’t know what the specific procedures are for doing a PLR or what the cost is? Would it be worth it to go that way?
Thanks!
K Surber
Permalink Submitted by Bruce Steiner on Mon, 2011-01-03 21:16
See my article on this subject in the October 1997 issue of Estate Planning: http://www.kkwc.com/docs/AR20050125164755.pdf.
Depending on the terms of the trust, it may be possible to get the IRA to the spouse, who can then roll it over. There have been numerous private letter rulings, some of which were issued before the article was published and are cited in the article.
The advantage of obtaining a private letter ruling is that the ruling is binding on the IRS with respect to the taxpayer to whom the ruling is issued. The IRS user fee for to apply for a private letter ruling is $10,000, and there will also be several thousand dollars of legal fees to apply for a private letter ruling.
In this case, you said that the custodian will accept a legal opinion. Assuming the terms of the trust are such that it is possible to get the IRA to the spouse, it will likely be significantly less expensive to have tax/estates counsel review the trust and, if possible, provide the appropriate opinion.
Permalink Submitted by mk foss on Mon, 2011-01-03 23:42
I’ve heard that some custodians will allow a beneficiary “clarification” as you propose if you can find a PLR with similar facts and if all parties sign a “hold harmless” letter absolving the custodian of all liability should the IRS disagree with the action. Some PLRs to look at are 200438044 and 200938042. One that didn’t work was PLR 200944059.
Permalink Submitted by Bruce Steiner on Tue, 2011-01-04 03:50
PLR 200438044 involved a disclaimer, as a result of which the spouse was the oldest beneficiary of the trust, so that distributions could be stretched out over the spouse’s life expectancy. I don’t know why they thought they needed to apply for a ruling, nor do I think the result was particularly good, though a stretchout over the spouse’s life expectancy is better than no stretchout at all.
PLR 200938042 involved a disclaimer, as a result of which the IRA got to the spouse. Often with enough disclaimers it’s possible to get the IRA to the spouse.
PLR 200944059 involved an IRA payable to a trust in which the trustee did not have complete discretion to distribute the trust assets to the spouse. This doesn’t appear to have been a close case, and unless there was a very large amount of money involved, I don’t know why they went through the effort to apply for a ruling.
Permalink Submitted by Kimberly Surber on Tue, 2011-01-04 18:09
I really, really appreciate all the comments I’ve gotten! But let me try to clarify all the information I’ve sifted through now! Generally speaking, when an IRA is left to a trust, and the trust has the spouse for its sole trustee and primary beneficiary, then as long as the spouse trustee has the power free and clear to handle the assets of the trust, then the service would allow her to roll it over into a spousal IRA. In my client’s case, the spouse is the sole trustee and primary beneficiary. They had one daughter and she is the contingent beneficiary. The IRA is not the only asset in the trust. The trust is an AB Trust, with the primary residence going in the A Trust, and all other assets going in the B Trust. PLR 200944059 does worry me a bit since it sounds as though that trust worked the same way as my client’s trust. Am I missing something? On the other hand, by reading PLR 9623056, that sounds as if it would be a good PLR to cite and would illustrate a positive response from the service. Also, is it relavent that upon the death of her husband, the B Trust became irrevocable? Thanks for any continued guidance!
Permalink Submitted by Sean Vaughn on Tue, 2011-01-04 22:27
Kim –
Trusts and Estates Magazine, April 2010 has a great little article that you might read – Michael Jones, ‘Chase Away IRA Spousal Rollover Demons’.
Apart from being a great periodical, it’s a good article that references the exact situation you present.
Chris
Permalink Submitted by Kimberly Surber on Tue, 2011-01-04 23:23
Chris – Can you (or anyone) post a link to the article? My subscription ran out in 2010 so I don’t have access to the whole article!
Thanks!
Permalink Submitted by Bruce Steiner on Tue, 2011-01-04 23:33
Mike’s article is a good one. (Mike and I are both on the advisory board of Trusts & Estates.) We can’t post it since Trusts & Estates includes access to their articles online as part of their subscription. But if you have a colleague in another law firm with a trusts and estates practice, they should subscribe to it, and should be able to give you a copy.
Mike points out that the preamble to the 2002 final regulations (issued after I wrote my 1997 article) is more liberal on this issue than the pre-2002 rulings. That may help you here, though you still have to overcome the fact that in your case, all of the assets other than the residence go to the credit shelter trust, and the spouse can’t possibly have discretion to distribute them to herself (or else it wouldn’t be a credit shelter trust).