IRS Ruling Underlines Importance of Naming the Right Beneficiary

IRS Ruling Underlines Importance of Naming the Right Beneficiary

In January this year, the IRS issued a Private Letter Ruling on the case of a man who passed away, leaving his IRA to his wife.

Confusion arose over the source of the IRA: did the widow receive it directly from her spouse or did it come from his estate? The tax authority’s ruling demonstrates the importance of taking care when designating the beneficiary of IRA assets.

The PLR examined this question: did the widow receive her husband’s IRA directly from him or from his estate or trust? If the husband’s assets were rolled over into his wife’s IRA within 60 days, they would be added to her taxable gross income in the distribution year if they came from his estate. However, if the IRA came directly from him, the widow could execute the rollover without suffering any adverse tax consequences.

In the end, the IRS determined that the widow had received her husband’s IRA directly from him, rather than from his estate. This allowed her to roll it over into her own IRA without having to include the funds in gross income in the distribution year.

The case is interesting because the husband originally named his trust as the sole beneficiary of his IRA. However, within nine months of his death, two key actions were taken: the trustee issued a Renunciation and Qualified Disclaimer, thereby surrendering its interest in the IRA. In the same period, the decedent’s son and grandchildren executed the same disclaimer.

The IRS ruled that while the husband’s trust was indeed the initial beneficiary, the acts of renunciation within the defined period changed that relationship and in essence transformed the widow into the direct beneficiary of the account. Score one for the widow.

For more information, please read:
The Importance of Proper Beneficiary Designations | Wealth Management


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