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Roll Over Beethoven (and Your IRA, Too)

You helped an elderly couple, Rutherford and Bea Hayes, with an IRS issue a few years back.  Out of the blue, Bea calls you with a question about Rutherford’s IRA. Bea explains that dear old Rutherford died a month ago, and one of his larger assets was an IRA. Unfortunately, Rutherford named his trust as the beneficiary of the IRA—though Bea is the sole trustee of the trust and has the power to amend or revoke the trust at her discretion. Further, she has the right to distribute all income and principal for her own benefit. Bea tells you that she wants to roll over Rutherford’s IRA into one or more IRAs held in her name; however, she is worried that doing so would trigger receipt of income that she would have to report on her return.

Slow Your Roll(over)

IRC § 408(d)(1) provides that any amount paid or distributed out of an IRA must be included in gross income by the payee or distributee, as the case may be, in the manner provided under IRC § 72.  However, IRC § 408(d)(3) provides an exception to income inclusion under IRC § 408(d)(1) for certain distributions from an IRA to the individual for whose benefit the IRA is maintained that are rolled over within 60 days to another IRA for the benefit of that individual.

IRC § 408(d)(3)(B) provides that IRC § 408(d)(3) does not apply to any amount described in IRC § 408(d)(3)(A)(i) received by an individual from an IRA, if at any time during the one-year period ending on the day of such receipt, such individual received any other amount described in IRC § 408(d)(3)(A)(i) from an IRA which was not includible in his gross income because of the application of IRC § 408(d)(3).

IRC § 408(d)(3)(C) provides that amounts from an inherited IRA cannot be rolled over into another IRA. Under IRC § 408(d)(3)(C)(ii), an IRA is treated as an inherited IRA if the individual for whose benefit the IRA is maintained acquired the IRA by reason of the death of another individual, and such individual is not the surviving spouse of the other individual.

IRS Treats Spouse as “Effective” Beneficiary

In PLR 202040003, held that because the surviving spouse (Bea) was the trustee and sole beneficiary of the trust, who was entitled to all income in the entire corpus of the trust, she was effectively the individual for whose benefit the IRA was maintained. Accordingly, if Bea receives a distribution of the proceeds from the IRA, she may roll over the distribution (other than amounts required to be distributed in accordance with IRC § 401(a)(9)) into one or more IRAs established and maintained in her name—so long as she does not receive any other amount from an IRA that was rolled over under IRC § 408(d)(3).

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