State Statute Throws Beneficiary a Lifeline!
Private Letter Ruling (“PLR”) 201706004 addresses a beneficiary designation issue. Taxpayer died owning an individual retirement account (“IRA”). The beneficiary designation indicated that taxpayer’s trust was the beneficiary. The only problem? There was NO trust created by taxpayer! The custodian of the IRA found no trust, the taxpayer’s will referenced no trust and taxpayer’s records revealed no trust. So what happens?
In taxpayer’s state, a state statute provided that a court could order a retroactive change in a beneficiary designation in certain limited circumstances. Taxpayer’s surviving spouse (“SS”) sought this PLR to determine that, if she was named as a beneficiary by a court order, whether she could rollover the amount into her own IRA with no adverse income tax consequences.
The PLR analyzed Section 408(d)(3) of the Internal Revenue Code (the “Code”) and determined that, if the rollover occurred no later than the 60th day after the day on which she received payment, she could roll over the amount into her own IRA. Taxpayer’s IRA would NOT be treated as an INHERITED IRA (one can not roll over an inherited IRA).
However, the SS was not the DESIGNATED beneficiary. Under the Code and the related regulations, the designated beneficiary can only be determined as of the date of the taxpayer’s death. Since SS was not the named beneficiary as of the taxpayer’s death, the amount had to be distributed to SS over a 5 year period as the taxpayer died before his required beginning date.
The Treasury regulations state that a required minimum distribution can NOT be rolled over. As the 5 year rule applied, the only minimum required distribution was in year 5. Thus, any amounts rolled over by the SS in years 1-4 were NOT required minimum distributions. Assuming the 60 day rule was met, distributions in years 1-4 would not be included in SS gross income. Any distribution in year 5 would be a required minimum distribution (because the amount has to be distributed out at least by year 5) and could not be rolled over and would be included in her income.
ADVICE: Carefully review ALL of your beneficiary designations and make sure they reflect your intent as to how you want those assets distributed. Try to do this once a year. The cost and legal fees of obtaining this PLR could have been avoided if someone had read the beneficiary designation and asked for a copy of the trust. Nevertheless, the PLR is favorable as to the roll over treatment. Legislatures in other states may want to consider this state statute. Florida has a trust statute that permits an interested person to modify a trust “to achieve the settlor’s tax objectives”. This author has proposed to our Florida Bar IRA committee that they review the statute cited in this PLR.
WORD OF THE WEEK: Charitable Remainder Trust is a trust from which either an annuity amount (for example, $4,000 a year) or a unitrust amount (for example 5% each year) is paid to an individual or group of individuals for a term of years, not to exceed 20 years, or a person’s life. At the end of the period or a person’s life, a charity receives the remainder of the trust assets. The charitable deduction allowed for the remainder interest ultimately distributed to charity is calculated using IRS tables. Comprehensive statutes and regulations govern these trusts.
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