Surviving spouse inherits IRA through husband’s estate

Submitted by Susan R-S on Sat, 2022-11-05 22:01

I’ve read related forum topics and here is what I think I understand and what questions I have. Thanks for setting me straight.

BACKGROUND: Husband died age 62 with a small, overlooked IRA naming his deceased father as bene w/ no other primary/contingent bene. Bank holding IRA says the result is that the bene is the estate. Roger that.

1. Bank wants to close and distribute IRA proceeds to estate. My understanding is that the estate admin has the right to direct the bank to establish an inherited IRA for the benefit of the estate. Q: The bank forms don’t seem to have a way to say this… is there some standard format verbiage to use to exercise this right? My understanding is that once the bank distributes the proceeds there is no way to undo it so we need to get this right.

2. The admin of the estate then would do a trustee-to-trustee transfer of the inherited IRA into inherited IRAs for each of the beneficiaries per the will. The result would be no taxable event for either the estate or the benes. Right?

3. The admin is the deceased’s surviving spouse and the only bene. My understanding is that since she is not directly inheriting the IRA from her husband she cannot use the spousal option take the IRA as her own but rather must take it as an inherited IRA. As such, she would be subject to the 5-year rule w/ no annual requirement but simply the requirement to fully distribute the IRA by the end of the 5th calendar year of her husband’s death.

Great forum. Thanks, all.



Submitted by Alan - IRA critic on Sun, 2022-11-06 17:16

  1. Banks are notorious for this policy, intending to disregard the IRS 5 year rule, and in many cases the right of the executor to assign the inherited IRA out of the estate to the will beneficiaries. The sooner they can distribute the funds to the estate, the less likely they are to become involved with complex estates, estate litigation, or other expensive situation. Executor should search out another IRA custodian that will accept a direct transfer of an inherited IRA in the name of the estate. SInce inherited IRAs are not very attractive to custodians perhaps approaching a custodian that already has accounts in wife’s name is the place to start. If a receiving custodian can be located, a letter can be then be sent to the bank by executor advising the bank that they agree to transfer the inherited IRA to another custodian ASAP. Perhaps the bank will cooperate given that they will be rid of the account this way, which is their main goal. The letter should also be clear that no distribution is to be made from the inherited IRA. All this said, it is advisable to verify that the default beneficiary is the estate, since a few IRA agreements default to the spouse instead of the estate, and that would make things much simpler.
  2. This is correct, but again many banks will not cooperate with the executor’s right to assign the inherited IRA out of the estate to inherited IRA accounts. In such cases, the inherited IRA should be transferred to a new custodian as mentioned above. Refusing to cooperate with assignment goes hand in hand with the lump sum distribution procedure at many banks.
  3. For the last 3 decades the IRS has consistently allowed a surviving spouse to do the spousal rollover when the spouse is the beneficiary of the estate, but many custodians still demand that the spouse secure their own PLR. If it turns out that a bank distribution is the only possible outcome, it may still be possible to locate a custodian to accept a spousal rollover within 60 days, without a long expensive PLR process. Major brokerage custodians such as Schwab, FIdelity or Vanguard may be the most likely to cooperate. With a spousal rollover of a distribution made to the estate, the income can be passed through the estate to the spouse, but the rollover will offset the taxable income. This would be Plan B if the bank remains non cooperative, even given assurance that an inherited IRA would be transferred out. PLRs cost upward of 20k and take many months to complete, so this should be avoided except in a last resort where the IRA balance is very large. Again, the spousal rollover will avoid the 5 year rule. 

Submitted by Bruce Steiner on Mon, 2022-11-07 03:15

There have been numerous rulings allowing the rollover, several of which I’ve obtained.  See my articles on this in the October 1997 issue of Estate Planning, https://www.kkwc.com/wp-content/uploads/2015/04/AR20050125164755.pdf , and in the June 2015 issue of Trusts & Estates, https://www.kkwc.com/wp-content/uploads/2015/08/IRA-Rollovers-Making-this-option-possible.pdf .

Submitted by Susan R-S on Wed, 2022-11-09 19:14

Thank you both. I read the related links. One thing I don’t understand re this question of the spousal right to roll into her own IRA: If there is only one bene of the estate being the surviving spouse, the admin of the estate could assign the IRA out of the estate into a bene IRA for the surviving spouse at an institution of her choice. Once that’s done, isn’t the fact that she inherited it through the estate lost? Doesn’t she just have a bene IRA whose original owner was her deceased husband? As such, why can’t she then (immediately or in a year or…) just establish that she is/was the spouse of the original IRA owner and exercise her right to roll the IRA into her own IRA? Why/how would the question of her not having been the named beneficiary even come up? 

Submitted by Alan - IRA critic on Wed, 2022-11-09 20:59

  • The following is copied from a Natalie Choate (IRA expert) article, and explains that an assignment of an IRA out of the estate to the estate beneficiaries does not change the beneficiary to a designated beneficiary. The estate still inherited the account.
  • “The IRS states twice that an estate cannot be a “designated beneficiary.” Reg. § 1.401(a)(9)- 4, A-3(a), § 1.401(a)(9)-8, A-11. This problem can NOT be cured by distributing the retirement plan itself (intact) out of the estate to the individual beneficiaries of the estate (either before or after September 30 of the year after the year of the participant’s death), unless by some chance the estate beneficiaries are identified as the beneficiaries “under the plan”—which would be unusual. The executor can transfer the IRA to the estate’s residuary beneficiaries; see PLR 2002- 34019. That’s not a problem. The problem is that such transfer will not have the effect of allowing the estate beneficiaries to use their own life expectancies for computing MRDs. Jane Example: Jane dies without having named a beneficiary for her IRA. Under the terms of the IRA agreement, the IRA is payable to her estate as default beneficiary, so she has no “designated beneficiary.” The only beneficiaries of her estate are her children Gray and Seymour. The executor of her estate, before taking any distributions from the IRA, transfers the IRA account to Gray and Seymour. This transfer does not trigger any income tax, because it is an assignment of the right-toreceive-IRD to the persons entitled to receive the IRD under the decedent’s will. The children are now the sole owners of the account. However they do not qualify as “designated beneficiaries” because they are not “designated as a beneficiary under the plan.” It does not matter, for this conclusion, whether the transfer occurred before or after September 30 of the year after the year of Jane’s death.”
  • Nonetheless, assignment of an inherited IRA to an inherited IRA for the spouse can be followed with the spouse electing ownership of the inherited IRA (spousal rollover). At that point, the account is no longer inherited,  and falls under the RMD rules of an IRA owner.  

Submitted by Susan R-S on Wed, 2022-11-09 21:29

BUT, your last paragraph, above, says “Nonetheless, assignment of an inherited IRA to an inherited IRA for the spouse can be followed with the spouse electing ownership of the inherited IRA (spousal rollover). At that point, the account is no longer inherited,  and falls under the RMD rules of an IRA owner.” So, this saying that the surviving spouse likely can (given IRS precedence in similar situations) elect the spousal rollover, but NOT because, as I was positing, there is no chain of inheritance through the estate but because the surviving spouse has special rights even if not a designated beneficiary.  

Submitted by Alan - IRA critic on Wed, 2022-11-09 22:11

Correct. The IRS has consistently allowed a surviving spouse inheriting through an estate or trust that permits distributions to roll distributions over to an owned IRA in 30 years of various letter rulings. This is simpler if spouse is the sole beneficiary and executor due to less resistance by the IRA custodian. That said, if the surviving spouse is under 59.5, they might want to keep all or a portion in an inherited IRA to secure penalty free distributions. In that case, the inherited IRA is still treated as an estate inherited IRA for RMD purposes. If IRA owner passed prior to RBD, the 5 year rule would require that the inherited IRA be distributed within 5 years, and the spouse would have to elect ownership before that time ran out. 

Submitted by Susan R-S on Wed, 2022-11-09 21:26

In an answer on a similar thread, ufleming observes that, “some states require the executor to deposit all funds into an estate account.” Does this mean that it might not just be the IRA custodian that wants to cash out the IRA but it could be the state of Washington rules dictating this???? Or perhaps I misunderstood the posted answer.

Add new comment

Log in or register to post comments