Is a spousal rollover available when the beneficiary of an IRA is a revocable trust? Surprisingly, in some cases, the IRS says yes.

Decedent named a joint revocable trust as the beneficiary of his IRAs. He established the trust with Wife, and the couple funded the trust with community property. Upon Decedent’s death, the revocable trust was divided into three subtrusts: the Survivor’s Trust, the Bypass Trust, and the Marital Trust.

Wife proposed to allocate the Decedent’s IRAs to the Survivor’s Trust. From there, she proposed to roll the Decedent’s IRAs over into IRAs that she established. This would allow her to forego required minimum distributions from her husband’s traditional IRA until she turned 70 1/2. With respect to Decedent’s Roth IRAs, a rollover would allow Wife to avoid lifetime distributions altogether. Because a spousal rollover is generally not available unless the surviving spouse is directly designated as beneficiary of an IRA, Wife requested that the IRS issue a private letter ruling treating her as payee of the IRAs allocated to the Survivor’s Trust.

The IRS granted Wife’s request. It first observed, however, that Wife technically cannot treat the IRAs as her own because the revocable trust was named as beneficiary. Nonetheless, the IRS noted the following:

  • Wife had “complete authority and sole control” in allocating assets to the subtrusts, including the Survivor’s Trust.
  • Wife was the sole trustee and sole beneficiary of the Survivor’s Trust.  
  • Wife was entitled to all the income and principal of the Survivor’s Trust. 
  • The Survivor’s Trust was revocable by Wife.

From these facts, the IRS concluded that Wife was effectively the individual for whose benefit the accounts were maintained. The ruling goes on to say:

Accordingly, if [Wife] receives a distribution of the proceeds of Decedent’s Roth IRAs and Decedent’s traditional IRA, she may roll over the distribution (other than those required minimum distribution amounts required to have been distributed or to be distributed in accordance with section 401(a)(9)) into a Roth IRA and a traditional IRA established and maintained in her name.

In other words, Wife could treat the IRAs as her own for rollover purposes, but only to the extent the IRAs were distributed to the Survivor’s Trust, and then from the Survivor’s Trust to Wife outright.  

Ideally, clients who want to preserve the spousal rollover option will name their spouse directly as beneficiary. However, in those cases in which clients fail to do so, inadvertently or otherwise, this private letter ruling provides a possible roadmap for relief.

As always, the standard caveat applies. A PLR is only binding on the person who requested it. Therefore, this PLR should be taken as guidance only and may not be relied upon as precedential authority.

Source: PLR 201707001

Posted by Joel D. Roettger, JD, LLM, EPLS