Need to Know: The Importance of Beneficiary Designations


You may know that updating your beneficiary information is an important part of estate and financial planning, but you may be interested to know that failing to do so can have unintended financial and tax consequences. This is especially true if someone names a trust as the beneficiary of an IRA (individual retirement account) rather than an individual.


This January, a Private Letter Ruling proved this important point. This particular PLR dealt with a determining if an individual had acquired the IRA of her deceased spouse directly from him, rather than his estate or trust, and the tax implications of the rollover of these assets.


The Internal Revenue Service ruled that the spouse received an IRA from her deceased spouse and not from the spouse’s estate, meaning she was able to roll over the IRA into IRAs established in her own name and that she wasn’t required to include the rolled-over distribution in her gross income in the year of distribution.


Renunciation and Disclaimer

The decedent was survived by his spouse (taxpayer), along with a son and two grandchildren. His only IRA named his trust as the sole beneficiary with no contingent beneficiary. Within nine months of the decedent’s death, the trustee of the trust signed a “Renunciation and Qualified Disclaimer” of any interest in the IRA. Also within nine months after the decedent’s death, the son and both grandchildren executed “Renunciation and Qualified Disclaimers” of any interest they may have in the IRA under the decedent’s estate. 


Taxpayer’s Request

The taxpayer requested the following rulings:

  1. The taxpayer, as the decedent’s spouse, would be treated as having acquired the IRA directly from the decedent, and not from the decedent’s estate or trust.

  2. The taxpayer is eligible to roll over the decedent’s IRA to one or more IRAs established and maintained in her own name in accordance with Internal Revenue Code Section 408(d)(3)(A)(i), provided that the rollover occurs no later than 60 days after the proceeds of the decedent’s IRA are distributed.

  3. The taxpayer wouldn’t be required to include the amount distributed from the decedent’s IRA in her gross income for federal income tax purposes for the calendar year in which the distribution and rollover occur. 


IRC Section 408(d)

Ultimately, the IRS found that IRC Section 408(d)(1) provides that, except as otherwise provided in IRC Section 408(d), any amount paid or distributed out of an IRA shall be included in gross income by the payee or distributee as provided under IRC Section 72.

The IRS applied Section 408(d)(3)(A), which provides that “Section 408(d)(1) does not apply to any amount paid or distributed out of an IRA to the individual for whose benefit the account is maintained if: (i) the entire amount received (including money and any other property) is paid into an IRA for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution; or (ii) the entire amount received (including money and any other property) is paid into an eligible retirement plan for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received, except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross income (determined without regard to section 408(d)(3)).” 


Taxpayer Becomes Beneficiary After Disclaimer

The IRS reasoned that, although the trust was designated as the beneficiary of the decedent’s IRA because the trust disclaimed its interest in the IRA, the IRA then passed on to the decedent’s estate. Because the son and both grandchildren all disclaimed their interests in the IRA, this void resulted in taxpayer being entitled to the IRA as the beneficiary of the decedent’s estate. Accordingly, for purposes of applying Section 408(d)(3)(A), the taxpayer was effectively the individual for whose benefit the IRA was maintained. Thus, she was entitled to roll over the distribution from the inherited IRA (other than those required minimum distribution amounts required to have been distributed or to be distributed in accordance with Section 401(a)(9)) into an IRA established and maintained in her name.

Rollover Allowed


The IRS concluded that: 

  1. In applying Section 408(d)(3), the taxpayer, as the decedent’s spouse, will be treated as having acquired the IRA directly from the decedent, and not from the decedent’s estate or trust.

  2. The taxpayer is eligible to roll over the inherited IRA to one or more IRAs established and maintained in her own name pursuant to Section 408(d)(3)(A)(i), provided that the rollover occurs no later than 60 days after the IRA proceeds are distributed.

  3. The taxpayer won’t be required to include the amount distributed from the IRA and rolled over into her own IRA account in her gross income for federal income tax purposes for the calendar year in which the distribution and rollover occur, provided the rollover contribution meets the requirements of Section 408(d)(3).

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