In one of our previous blog posts, we discussed the growth of trusts that are utilized specifically to be named as beneficiaries of retirement accounts, and the various benefits associated with said trusts (“IRA Trusts”). One major negative of IRA Trusts however, is that, in the event an IRA Trust is used as a beneficiary on one’s retirement account, and the surviving spouse is the beneficiary of the IRA Trust, the surviving spouse loses the ability to roll the retirement account over into her own IRA. The reasoning behind this, as per the Internal Revenue Service (the “IRS”), is that, for the purposes of applying Code section 408(d)(3)(A), the surviving spouse cannot treat the IRA as her own, since the IRA Trust was the beneficiary, not her personally.
That being said, on November 2, 2018, the IRS issued a Private Letter Ruling (a “PLR”) which held that, when there is an IRA Trust named as a decedent’s beneficiary, the surviving spouse has the ability to roll the IRA over so long as the surviving spouse is the sole trustee and sole beneficiary of the IRA Trust. In such a case, there is a major benefit to the surviving spouse in that she will not be faced with an immediate tax on the IRA.
While this is an important ruling, the IRS specifically stated in the PLR that its rationale was based off of the fact that the surviving spouse essentially received the IRA directly from the decedent since she was the sole trustee, she reserved the right to revoke the trust, and she had the ability to distribute the entire principal of the trust to herself. Generally, when IRA Trusts are set up, they are done for a particular purpose, in order to protect either the decedent or the beneficiary. For example, the decedent may set up an IRA Trust to protect himself from his surviving spouse changing the ultimate beneficiaries of his IRA, or, he may set it up to protect a beneficiary from creditor issues. By naming the beneficiary as the sole trustee and sole beneficiary of an IRA Trust, these benefits are lost.
As a result, while the PLR provides added flexibility when it comes to IRA Trusts, the benefits it offers will only be advantageous in limited circumstances. To learn more about the benefits of establishing IRA Trusts, contact Katz, Smith & Chwat, PC to set up an appointment.