Spouse Was Designated Beneficiary Of Roth IRA For Purposes Of Minimum Distribution Rules

Posted by Kim Chen on July 1st, 2019

PLR 201923016
In a Private Letter Ruling, IRS determined that a surviving spouse was the designated beneficiary of the taxpayer’s Roth IRA for purposes of the Required Minimum Distributions (RMDs) rules. A retroactive election allowed by a state court which caused other beneficiaries than the surviving spouse to potentially exist was not effective to change federal tax law applicable at the time of the taxpayer’s death.
Background. Under Code Sec. 401(a)(9)(A), a trust (including the retirement plan at issue, a Roth IRA) will only be considered qualified if the retirement plan provides that the entire interest of each taxpayer
1. Will be distributed to that taxpayer no later than the required beginning date, or
2. Will be distributed, beginning no later than the required beginning date, over the life of the taxpayer or over the lives of the taxpayer and a designated beneficiary or over a period not extending beyond the life expectancy of the taxpayer or the life expectancy of the taxpayer and a designated beneficiary.
In general, under Reg. §1.401(a)(9)-2, Q&A 2(a), the “required beginning date” for an IRA is Apr. 1 of the calendar year after the year that the taxpayer turns 70-½. Reg. §1.401(a)(9)-5, Q&A- 5(a), provides that if the taxpayer dies on or after required beginning date and has a designated beneficiary, the applicable distribution period for minimum distributions for years after the year containing the taxpayer’s date of death is the greater of the life expectancy of the designated beneficiary or the taxpayer.
Under Reg. §1.401(a)(9)-5, Q&A-5(c)(2), using calendar years, if the taxpayer’s sole beneficiary is a surviving spouse, the applicable distribution period is measured by the surviving spouse’s life expectancy using the surviving spouse’s birthday for each distribution year after the year of the taxpayer’s death up through the year of the spouse’s death. For years after the year of the spouse’s death, the applicable distribution period is the life expectancy of the spouse using the age of the spouse on the spouse’s birthday in the year the spouse died, reduced by one for each year that has passed after the year the spouse died.
While no minimum distribution rules apply to a Roth IRA while the taxpayer is alive, the post-death distribution rules for Roth IRAs generally are the same as the RMD rules that apply to traditional IRAs after the taxpayer’s death. (Reg. §1.408A-6, Q&A-14)
Under Reg. §1.401(a)(9)-4, Q&A-5, if a trust is named as beneficiary of a plan, and the trust was valid and became irrevocable on the death of the decedent, its beneficiaries were identifiable, and appropriate documentation had been provided to the trust’s administrator, the trust’s beneficiaries are treated as designated beneficiaries of the plan. Where one trust names a second trust as beneficiary, IRS generally looks through or past the language of the second trust to the named individual beneficiaries of that trust to determine the beneficiaries of the first trust. This is informally known as a “see-through” trust.
Reg. §1.401(a)(9)-5, Q&A- 5(a), provides that if a taxpayer dies on or after the taxpayer’s required beginning date and has a designated beneficiary, the distribution period for RMDs after the year containing the taxpayer’s date of death is the greater of the life expectancy of the designated beneficiary or of the taxpayer.
Facts. The decedent created a living revocable trust which became irrevocable after his death. It was divided into a marital deduction subtrust (marital trust) and two other subtrusts for his daughter and the family. At his death, the decedent owned a Roth IRA, of which the marital trust was the named beneficiary. The decedent died after the required beginning date of the Roth IRA. The trust provided that all amounts of any subtrust that was the beneficiary of a retirement plan were to be paid outright to the designated plan beneficiary of the subtrust. It also provided that an independent trustee could make an irrevocable election to render this provision inoperative to a subtrust that was a plan beneficiary, thus allowing the subtrust to accumulate assets in the subtrust rather than paying all amounts to the designated plan beneficiary. Although no independent trustee was appointed on the decedent’s death, a state court later ratified a settlement agreement allowing the decedent’s daughter to act as independent trustee of the marital trust, and to retroactively elect to treat the marital trust as an accumulation trust.
IRS determines spouse to be designated beneficiary of Roth IRA. If the daughter’s election were treated as valid with respect to the tax law, the surviving spouse would not be the sole beneficiary, and so would not benefit from the distribution rules applicable. The election allowed by the court through retroactive reformation of the trust would have resulted in other potential beneficiaries, which would have negated application of the spousal beneficiary rules. However, IRS concluded that the tax consequences under federal law applicable at the date of death remained applicable, notwithstanding later retroactive modification by the state court.
IRS determined that the marital trust was valid and became irrevocable on the death of the decedent, its beneficiaries were identifiable (the surviving spouse), and appropriate documentation had been provided to the trust’s administrator. As a result, the trust was a “see-through” trust under Reg. §1.401(a)(9)-4, Q&A-5. Therefore, the spouse, as beneficiary of the marital trust, was treated as designated beneficiary of the Roth IRA for purposes of the Code Sec. 401(a)(9) RMD rules, under Reg. §1.401(a)(9)-4, Q&A-5. This included the determination of the distribution period under Code Sec. 401(a)(9).
In addition, pursuant to Reg. §1.401(a)(9)-5, Q&A-5(a), RMDs from the Roth IRA were calculated based on the life expectancy of the spouse, determined under Reg. §1.401(a)(9)-5, Q&A-5(c)(2). Nevertheless, distributions that satisfy the rule of Reg. §1.401(a)(9)-5, Q&A-5(c)(1), pertaining to non-spouse beneficiaries, would meet the RMD requirements since that rule produces distributions that are no less rapid than under Reg. §1.401(a)(9)-5, Q&A-5(c)(2).
References. For discussion of Roth IRAs, see FTC 2d/FIN ¶H-12290; United States Tax Reporter ¶408A4. For discussion of minimum distribution rules of Roth IRAs, see FTC 2d/FIN ¶H-12290.42; United States Tax Reporter ¶4084.032. For discussion of trusts treated as beneficiary of decedent’s IRA, see FTC 2d/FIN ¶R-6422.

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