In a recent Private Letter Ruling (PLR 201423043), the IRS stated that a deceased person’s Roth IRA may be inherited by the Roth IRA owner’s surviving spouse through their Trust when the surviving spouse was the sole beneficiary and had sole control of the Trust upon the passing of her husband.

As many retirement account owners already know, listing your Revocable Living Trust as the beneficiary of your retirement account can be tricky as the Trust needs to meet certain requirements in order to receive rolled-over funds from the surviving spouse.

For example, Under Reg. § 1.408-8, Q&A 5, a surviving spouse of an IRA owner may elect to treat the spouse’s entire interest as a beneficiary in an individual’s IRA as the spouse’s own IRA, but only if the spouse is the sole beneficiary of the IRA and has an unlimited right to withdraw amounts from the IRA.

The IRS has stated that, “If a trust is named as beneficiary of the IRA, this requirement is not satisfied even if the spouse is the sole beneficiary of the trust.” Under the PLR though, the IRS stated that when the surviving spouse is the sole trustee of a trust and has the sole authority and discretion under the trust to pay the IRA proceeds to herself/himself, then the spouse may rollover the deceased spouses Roth IRA to the surviving spouses Roth IRA as long as the rollover occurs within 60 days of the distribution from the deceased person’s IRA.

The rules regarding spousal rollovers can be tricky and you should consult with your attorney before listing your trust as the beneficiary of your IRA. As a result, I have the following three tips to follow when listing beneficiaries on your retirement accounts.

  1. When In Doubt, List Your Spouse Directly, Don’t List Your Trust – If you aren’t sure about whether your Trust qualifies as a beneficiary for your retirement account, then list your spouse directly as the beneficiary.
  2. If You List Your Trust  Instead of Your Spouse, Make Sure Your Trust Qualifies- Have an attorney review your Trust to make sure that it meets the requirements above (that your spouse will have sole control and authority under the trust to distribute the IRA to himself/herself) so that your spouse can rollover the retirement account in the most tax advantageous manner possible. For example, a spouse can rollover their deceased spouse’s account into their own account as was shown in the PLR above. That’s a great tax benefit as you can keep the funds in a retirement account and outside of taxation longer. However, if the Trust doesn’t meet the proper requirements then the trust receives the retirement account and it cannot be directly rolled into the retirement account of the surviving spouse and must instead be distributed.
  3. Consider a Separate IRA Trust for IRA’s Over $1M- If you have an IRA over $1M, you may benefit by having a special IRA trust as the beneficiary of your IRA. It depends on your goals and tax planning, but is worth considering.

Bottom line, the rules here are very tricky so consult with your estate planning attorney on the best way to list your heirs as beneficiaries on your retirement accounts.

By: Mat Sorensen, Attorney and Author of The Self Directed IRA Handbook