Estate Named Beneficiary

Submitted by Laura Hisey on Wed, 2011-01-26 20:37

I have a situation I have seen a number of times in this forum, but I am trying to get a feel for the mechanics of how the situation needs to be handled.

The husband named his estate the beneficiary of his annuity IRA. He passed away in 2009. The annuity company insisted payment must be made to the estate, and the money was dispersed to the estate. The IRA is the only asset of the estate. The wife is the sole beneficiary of the estate and is the sole executrix of the will.

A check is written from the estate to a new annuity company for an IRA for the wife (within the 60 day window). The new company would not issue this annuity as a spousal IRA because the payout had been to the estate, and they made the wife sign a statement that the policy was to be issued as a traditional IRA. The wife noted in the memo area of the check for the new IRA the intention for it to be a “60 Day Rollover.”

The facts of this situation seem to be in line with those of many of the private letter rulings where the service allowed the funds to be treated as being dispersed to the spouse and not the estate where the spouse was the sole beneficiary and the sole executor.

Is our only option to obtain a private letter ruling to be able to treat this as a 60 day rollover/spousal IRA? Could we file the individual return treating the transaction as a rollover with a disclosure of our position attached? I know we cannot cite private letter rulings as authority, but we could use the same reasoning used in those rulings. Does the estate need to file a return showing the receipt of the income and the dispersal to an IRA for the wife?

The amount in question is close to $270,000, so we are dealing with a large potential tax liability. Any thoughts would be greatly appreciated.



Submitted by Al Fry on Wed, 2011-01-26 21:13

If it is issued as a Traditional IRA, who is the owner? Who is the annuitant? How old is the Spouse?



Submitted by Laura Hisey on Wed, 2011-01-26 21:32

The wife is the annuitant and the owner of the IRA. Her husband died before he needed to take any RMDs. The wife is 73.



Submitted by Michele Keith on Wed, 2013-05-22 16:29

Dear Laura,I have a very similar case to yours.  Ford employee died in September – signed a lump sum payout prior to his death for $430,000 then he died before check issued.  Ford just issued a check to the estate.  Wife is sole administrator and sole beneficiary of estate. Thinking of NOT filing the PLR but filing the income tax returns as noted on your comments.  Wondering if the IRS ever reviewed/questioned your spouse?Thank you, Michele Keith, Attorney



Submitted by Michele Keith on Wed, 2013-05-22 16:30

Dear Laura,Did the IRA ever question your filed income tax returns or did you go with the IRA?  I have a very similar situation and I’m contemplating how to handle it.  Hate to pay that $10,000 PLR fee if not necessary – but big lump sum to estate ($400,000).  Thank you,.Michele Keith, Attorney, Kent, Ohio



Submitted by Alan Spross on Thu, 2011-01-27 00:40

This challenge would have been much easier if the estate could have been terminated and the IRA assigned to the spouse PRIOR to any IRA distribution. If the annuity company balks at the assignment, spouse could transfer to another IRA custodian who routinely accepts such accounts. There would then be a 1099R issued directly to the surviving spouse and this would have been reported as a routine rollover on line 15 of Form 1040. Any IRS inquiry is unlikely since this looks just like the spouse was the designated beneficiary of the IRA. It would also escape IRA custodian “screening” if the surviving spouse did not mention the estate pass through.

I am not sure how you would best report this otherwise, but it appears that the distribution to the estate would go through a 1041 with a K-1 issued to the beneficiary (spouse). That IRA income would go on Sch E and flow to line 17 of Form 1040. Spouse would then have to offset that income on line 21 with an explanation of the rollover on line 21. This certainly invites IRS inquiries and potential problems with the rollover approval.

There have been dozens of PLRs allowing the surviving spouse who is also the sole estate beneficiary and trustee to complete a rollover. There is sufficient consistency of conditions here that it would be a waste of money to pursue a PLR unless forced into it. You could look up dozens of such ruling on the IRS site for letter rulings, but this might take some time.

I know that Bruce Steiner has secured plenty of these rulings, but I cannot locate anything on how he handled the reporting question, especially if the IRA had first been distributed to the estate. Many banks and insurance companies cannot wait to get the check issued to the estate and out the door so they do not have to screen IRA assignments.



Submitted by Al Fry on Thu, 2011-01-27 02:49

I guess I am missing something. What is the goal here? Is the objective to delay RMDs? For how long?



Submitted by Bruce Steiner on Thu, 2011-01-27 03:51

If you get a ruling, you need not concern yourself with how it’s reported.

If the executor wanted to (and was able to) assign the annuity to the spouse, he/she could have done so without having to wind up the estate. But annuity companies (i.e., the annuity departments in insurance companies) tend to be difficult to deal with.

There have been enough similar rulings that some surviving spouses may be willing to do the rollover without a ruling, and some financial institutions will allow rollovers without a ruling, though they may require a legal opinion. Of course, if the spouse receives the money and contributes it to her own IRA within 60 days, the custodian of the spouse’s IRA might not know the history.

Private letter rulings are not binding on the IRS except with respect to the taxpayers to whom they are issued. The surviving spouse may want to discuss with the attorney handling her husband’s estate, or other tax/estates counsel, whether she wants to get a ruling. The benefit of getting a ruling is that it provides certainty. However, there is an IRS fee of $10,000 for the ruling, plus the legal fees involved in preparing the ruling request.

For more on this, see my article on this subject in the October 1997 issue of Estate Planning: http://www.kkwc.com/docs/AR20050125164755.pdf.



Submitted by Alan Spross on Thu, 2011-01-27 04:31

Al,
Apparently the most urgent problem is avoiding the lump sum taxable distribution the spouse now faces.



Submitted by Laura Hisey on Thu, 2011-01-27 12:25

The transactions have already occurred. The lump sum was distributed to the estate, and the money then went from the estate into a new IRA for the spouse within 60 days.

We no longer have the option of trying to find an IRA company that would treat it as a spousal rollover. We already have the 1099 to the estate in hand.

Do we have any options at this point, or are we beyond repair?



Submitted by Al Fry on Thu, 2011-01-27 15:02

Alan – if the money is in a Traditional IRA in her name as owner, why would she need to make a distribution beyond her RMD?



Submitted by Laura Hisey on Fri, 2011-01-28 01:39

[quote=”[email protected]“]I am not sure how you would best report this otherwise, but it appears that the distribution to the estate would go through a 1041 with a K-1 issued to the beneficiary (spouse). That IRA income would go on Sch E and flow to line 17 of Form 1040. Spouse would then have to offset that income on line 21 with an explanation of the rollover on line 21. This certainly invites IRS inquiries and potential problems with the rollover approval. [/quote]

Is it possible to attempt reporting the event as above, and only seek a PLR if the IRS inquires? Or is a PLR something that has to be obtained before you file?



Submitted by Alan Spross on Fri, 2011-01-28 01:58

At this point, I would wait to see if there is any IRS challenge to the rollover. No point in spending 10,000+ until you have to. But the return should include an explanation on line 21 why the income is being backed out, ie the spouse was sole beneficiary and executor of the estate and there have numerous IRS letter rulings approving a rollover for the surviving spouse.



Submitted by Laura Hisey on Fri, 2011-01-28 17:41

Thanks so much for all of the help on this. The issue seems to come up often enough, it sounds like a good candidate for a Rev Proc to be issued.

I really appreciate your knowledge and experience and willingness to share it. 😀



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