November 6, 2011
Authored by: Kathy Sherby and Stephanie Moll
In PLR 201125047, the IRS allowed a surviving spouse to roll over a decedent’s entire IRA to the surviving spouse’s IRA when the surviving spouse exchanged her community property interest in other property for the decedent’s community property interest in his IRA, as authorized under applicable state law.
The decedent, who we will call David, resided in a community property state with his wife, whom we will call Susan, to whom he had been married for 21 years. David had failed to name a beneficiary of his IRA, so that when he died, the beneficiary was David’s estate. David and Susan had created a community property trust, and David’s Will caused the IRA to become an asset of this trust.
The community property trust provided for the creation of a Marital Trust consisting in part of all of Susan’s one-half community property portion of the trust property and Susan’s separate portion of the trust property. The Marital Trust was a separate trust over which she had an unlimited right to require distribution. Therefore, Susan’s community property interest in David’s IRA was allocated to the Marital Trust as required by the community property trust instrument. The Trustee and Susan exchanged her community property interest in other property for David’s community property interest in David’s IRA, as authorized under applicable state law. This exchange caused the entire IRA to constitute community property belonging to Susan. The Trustee then allocated the balance of David’s IRA to the Marital Trust, as directed by the trust instrument.
Susan requested that the IRS rule that David’s IRA would not be treated as an inherited IRA, and that Susan would be eligible to roll over the IRA in a trustee-to-trustee transfer to her own IRA.
The IRS referred to the statement in the preamble to the regulations that “a surviving spouse who actually receives a distribution from a deceased spouse’s IRA is permitted to roll that distribution over into his/her own IRA even if the spouse is not the sole beneficiary.” The Service then reiterated its position that the surviving spouse needs to have sole authority under the trust to require the distribution of the IRA to herself.
Finally, and most notably, the Service then recognized the impact of the state’s applicable community property laws that resulted in Susan owning one-half of the IRA and authorized the exchange of Susan’s community property interest in other property for David’s one-half community property interest in the IRA, stating that, “The Service notes that determining if IRA C was/is community property, and, as such, which of the sub-trusts was to receive IRA C lies outside the scope of Code section 408.” This is the first time that the Service has recognized expressly the impact of state community property laws on the disposition of an IRA and validates post-mortem planning through community property exchanges to qualify for a spousal rollover.
Since David’s entire IRA was allocated to the Marital Trust, over which Susan had the right to require distribution of the trust property outright to her, David’s IRA would not be treated as an inherited IRA and Susan would be able to roll over the IRA to her own IRA.
In order to obtain the best tax results for your own retirement plans, it is important that you talk with your attorney to make sure you have the proper beneficiary designation on file with your plan provider.