Disclaimers Result in IRA Passing to Decedent’s Estate of which Surviving Spouse is Sole Beneficiary; IRS Permits Spousal Rollover instead of Requiring Inherited IRA Treatment

The Decedent died at an age greater than 70.5 owning an IRA.  The 100% beneficiary of the IRA was a Trust.  The Decedent did not name a contingent beneficiary.  The Trust executed a qualified disclaimer of the IRA.  Each of the Decedent’s descendants also executed qualified disclaimers of the IRA.  As a result of these qualified disclaimers, the IRA passed to the Decedent’s estate to be governed by the Decedent’s Will under which the Decedent’s spouse was the sole beneficiary.

In PLR 201901005, the IRS ruled that for purposes of Code § 408(d)(3), the Decedent’s spouse will be treated as having acquired the IRA DIRECTLY FROM THE DECEDENT, and not from the Decedent’s estate.  Further, the Decedent’s spouse is eligible to roll over the Decedent’s IRA into such spouse’s own IRA.

Keep this ruling in mind for post-death planning of retirement benefits when the surviving spouse is not named as the IRA beneficiary.

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Trump Issues Executive Order on Strengthening Retirement Security

Trump issued the Executive Order on Strengthening Retirement Security in America on August 31, 2018.  In this Executive Order, Trump called on the Treasury Department to consider increasing the life expectancy rates that determine how much retirees must withdraw from their 401(k)s and IRAs when they attain 70 and ½ years.

These rates have not been increased since 2002.  With higher life expectancy rates, there would be a greater chance that more money will be leftover when the IRA owner dies.  And, for non-spouse individual beneficiaries (or see-through trusts), this means more money available for the “stretch” over their lifetimes.

It is unclear if the Treasury will change the life expectancy tables for both owners AND beneficiaries.

And, while people are living longer and it may be reasonable to increase the life expectancies, Steven M. Rosenthal, a senior fellow in the Urban-Brookings Tax Policy Center, says that, “On the other hand, you don’t want to exacerbate the problem of tax planning” and allow people to reap tax benefits far beyond a normal retirement period.

If the life expectancy rates do change, the changes will likely be marginal.

Versprille, Allyson. Trump Order May Allow Rich to Pass On More Tax-Deferred Wealth. Daily Tax Report. Bloomberg BNA. September 7, 2018.

IRA Payable to Trust at Decedent’s Death Qualifies as Spousal Rollover

Decedent (“Husband”) and Wife created a revocable trust (“Trust”) under state law.  Upon Husband’s death, Wife became the sole Trustee of the Trust.  At the time of Husband’s death, Husband owned an IRA, and the Trust was listed as the beneficiary of the IRA.

Pursuant to the terms of the Trust, certain assets, including the IRA, were allocated to a Survivor’s Trust.  Wife was the sole income and principal beneficiary of the Survivor’s Trust.  Wife also had the unlimited right to appoint any or all of the Survivor’s Trust property, including to herself.  Wife exercised this power of appointment to distribute the assets of the IRA to a non-IRA account in the Survivor’s Trust.  Then, within sixty (60) days of such distribution, those amounts were transferred from the non-IRA account held by the Survivor’s Trust to a Rollover IRA, established in Wife’s name.

In PLR 201831004, the IRS determined that Wife is the distributee of Husband’s IRA, Husband’s IRA is NOT an inherited IRA, and Wife’s spousal rollover of assets from Husband’s IRA into a Rollover IRA (notwithstanding the fact that the assets were held in a non-IRA account before being paid over to the Rollover IRA) in Wife’s name was a valid spousal rollover.

Here, the IRS continued its position of allowing a spousal rollover of an IRA that was payable to a Trust.  But, if you want a no-hassle spousal rollover, double check that you’ve named the surviving spouse as the designated beneficiary of the IRA.

LISI 60-Second Planner: PLR201831004: Rollover of IRA Permitted. Leimberg Information Services, Inc. (LISI). August 14, 2018.

Withholding and Reporting Requirements Apply to Payments from IRAs to State Unclaimed Property Funds

Revenue Ruling 2018-17 provides that payment of an individual’s interest in a traditional IRA to a state’s unclaimed property fund, pursuant to state law, is subject to both federal income tax withholding under Internal Revenue Code § 3405 and reporting requirements under Internal Revenue Code § 408(i).  For example, the Trustee of a traditional IRA must report a $1,000 distribution from the IRA, $900 of which is paid to the state’s unclaimed property fund and $100 of which is remitted as federal income tax withholding on a 1099-R, identifying the individual who has the interest in the IRA as the recipient.

How the Tax Cuts and Jobs Act Affects Retirement Benefits

Natalie Choate, the country’s leading expert on retirement planning, takes note of the following changes:

  1. Until now, an individual converting a traditional retirement plan into a Roth IRA had the option to reverse the conversion until the extended due date of his tax return for the conversion year. The Tax Cuts and Jobs Act removes this right to undo a Roth IRA conversion.
  2. The Conference Committee’s Explanatory Report confirms that “back-door Roth conversions” are permissible. According to Choate, “An individual who is under age 70.5 and who has compensation income, but whose adjusted gross income is too high to permit her to make an annual-type contribution to a Roth IRA, can instead make her annual contribution to a traditional IRA, then convert that traditional IRA to a Roth (because there is no income limit applicable to conversions).”  The Conference Committee’s Explanatory Report states that this contribution-conversion trick is permissible, and therefore does not violate the step-transaction doctrine.
  3. Qualified charitable distributions may become more popular now that the Tax Cuts and Jobs Act has substantially increased the standard deduction. Some taxpayers may find that making a qualified charitable distribution directly from an IRA, for which there is an income exclusion, in addition to the standard deduction the taxpayer receives from the taxpayer’s other income, is more beneficial than making a charitable contribution outside of the taxpayer’s IRA.

LISI Employee Benefits and Retirement Planning Newsletter #685 (January 2, 2018) at http://www.leimbergservices.com   Copyright 2018 Leimberg Information Services, Inc. (LISI). (subscription required)

Making Charitable Distributions from IRAs.

Any individual who it at least 70.5 years of age can make direct charitable gifts from his or her IRA of up to $100,000 to certain public charities.  The client does not receive a charitable deduction.  Rather, the tax benefit is that the client is not paying income tax on the money distributed. Make sure that the distribution is made directly from the IRA’s administrator or trustee to the qualified charity.  Lastly, the donor must receive NO benefit, not even a chicken dinner, or the entire distribution will be taxable.  Remember that even though Donor Advised Funds are public charities, they don’t qualify as recipients for these distributions.   To learn more, read Conrad Teitell’s September 25, 2017 article, “Tax-Free Direct Charitable/IRA Distributions” here.