Surviving Spouse Can Roll Over IRA Proceeds Received from Trust

A and C were married and created trust D, a revocable, inter vivos trust. They were the grantors, co-trustees and beneficiaries of D, which provided that the survivor would be the surviving grantor-trustee and sole beneficiary. A named D the beneficiary of her IRA and subsequently died.

D provided that, on the first death of a grantor, it would be divided into two subtrusts: subtrust E, a survivors trust, and subtrust F, a credit shelter trust. As the surviving grantor-trustee, C has the power of allocation between the subtrusts and is the trustee and beneficiary of both. He is also entitled to all net income from F and can invade the principal under an unascertainable standard. Further, C has the right to withdraw any or all of the income and/or principal from E, a right not limited by trustee discretion.

C proposes to (1) accept receipt of the proceeds of  As IRA as the surviving trustee of D; (2) allocate them to subtrust E; (3) withdraw the proceeds from E; and (4) roll over the funds into his IRA, all within 60 days of the original receipt of the proceeds from As IRA.

Analysis

According to Sec. 408(d)(1), any amount paid or distributed from an IRA must be included in gross income as provided under Sec. 72. Rollover contributions meeting the Sec. 408(d)(3) requirements will not be included in gross income if the entire amount is paid into the individuals IRA within 60 days of receipt. However, Sec. 408(d)(3) does not apply to an inherited IRA; no amount transferred from an inherited IRA to another IRA may be excluded from income by reason of such transfer. In addition, the inherited account is not an IRA for purposes of determining whether any other amount is a rollover contribution.

An IRA would be inherited if the beneficiary acquired it due to the death of another individual and he or she is not the decedents surviving spouse. Thus, only a surviving spouse who acquires IRA proceeds may elect to treat them as his or her own and roll them over into his or her own IRA.

Generally, when the assets of a decedents IRA pass to a third party (e.g., a trust) and are then distributed to a surviving spouse, the spouse will be treated as having received the assets from the third party, not from the decedent. As a result, the spouse will not be able to take advantage of Sec. 408(d)(3). However, because C has complete control and dominion over D and  E and the disposition of the trusts assets, the general rule does not apply; he can roll over As IRA distribution into an IRA set up and maintained in his own name. Further, this constitutes an election to treat As IRA as his own IRA.

Thus, the IRS concluded:

• The proceeds of As IRA distributed from E to C will not be an inherited IRA under Sec. 408(d)(3)(C).

• C will be treated as having acquired  As IRA proceeds from A, not from D.

• None of the proceeds of As IRA will be includible in Cs gross income if C timely rolls them over into his own IRA.

IRS Letter Ruling 200304037 (1/24/03)

REFLECTIONS: The IRS reached a similar result in Letter Ruling 200304038, in which a deceased spouse designated her estate as the sole beneficiary and the surviving spouse transferred the IRA proceeds from the estate to his own IRA. The surviving spouse was the estates personal representative and sole beneficiary  under state intestacy laws. For a discussion of how to minimize income taxes on a decendents IRA proceeds, see Lange, Cascading IRA Beneficiaries, 34 The Tax Adviser 34 (January 2003).