National Association of Estate Planners and Councils

January, 2007 Newsletter
Provided by Leimberg Information Services

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"How Do You Spell Arbitrary and Capricious?"

Did you ever notice how it's difficult to get some people to say what they REALLY THINK! (Or how difficult it is to get SOME people to just THINK!).

LISI Commentators certainly don't have either problem!

Natalie B. Choate, a/k/a/ the fabulous Ms. "N", author of two giant sellers,  LIFE AND DEATH PLANNING FOR RETIREMENT BENEFITS - 6TH EDITION  (800 247 6553) (See our review in Estate Planning Newsletter 1035) and  THE QPRT MANUAL (1-800-247-6553) (See our review in Estate Planning Newsletter # 757) asks the question,

"How Do You Spell Arbitrary and Capricious?"

Executive summary:

The IRS has a long-standing policy of allowing a surviving spouse to roll over benefits that are left to her through the estate (or a trust) of her deceased spouse. 2006 PLRs have continued that policy. However, the IRS has to date refused to put this policy into any form that taxpayers can rely on (such as a regulation or Revenue Ruling). That continued in 2006 as well, prompting this author to say: Shame on the IRS for its get-tough on widows policy, and for continuing to issue these nonsensical and self-contradictory PLRs!



How stressful is it to have your husband or wife die? I think most would agree that the death of a spouse is one of life's most traumatic events.

Is that traumatic situation made more or less stressful if the deceased had not done proper estate planning—for example, if the decedent's IRA is payable to his estate because he never bothered to name a beneficiary?

I think most people would say that the loss of a spouse is even more stressful if that spouse did not leave his financial affairs in proper order.

But widows and widowers in that difficult situation see a light at the end of the tunnel: Thanks to a longstanding, wise, and generous IRS policy, even though the decedent forgot to name the surviving spouse as beneficiary, the widow or widower can still salvage the situation by using a spousal rollover:


IF the widow or widower is the beneficiary of the estate (or trust) that is the beneficiary of the IRA, all he/she has to do is distribute the IRA or retirement plan money to him/herself as beneficiary of the estate (or trust), then roll it over to his/her own plan or IRA, and all is well! Right?


Yes that IS the IRS policy -  provided certain conditions are met.

The conditions are that the spouse must have the right, as beneficiary, without the consent of any third party, to cause those benefits to be distributed to him/herself. If the allocation and/or distribution of the benefits to the surviving spouse (through the estate or trust) is subject to the discretion of a third party, this condition is not met—unless the surviving spouse him/herself is the fiduciary who holds that discretion.

But even if these conditions ARE met, this longstanding, wise, and generous IRS policy is not embodied in a form that taxpayers can rely upon, such as a regulation or Revenue Ruling.  Rather it appears only in private letter rulings.


This IRS policy has been consistent for at least 17 years (see PLR 8911006); PLRs to this effect have been issued steadily through all three versions of the proposed and final minimum distribution regulations. See ¶ 3.2.08 of Life and Death Planning for Retirement Benefits (6th ed., 2006; ), where a couple dozen such rulings are listed.  But it is not in any regulation or Revenue Ruling!


Thus, cautious taxpayers often seek their own PLRs to support such a rollover (or an IRA provider may require such a PLR to allow the rollover). Which means the already-traumatized widow or widower must incur a $9,000 IRS "user fee," plus legal fees. The IRS has turned these taxpayers' trauma into a money-making machine for the IRS.


2006 has seen two particularly egregious examples of this outrageous IRS behavior. In these two PLRs the IRS piously quotes its own policy to the effect that a particular rollover is NOT allowed…then turns around and allows the rollover anyway!

One involves a trust and one involves an estate:

The trust: PLR: 200644028: The participant ("P") died in 2005, after his RBD, leaving his IRA to a trust. The surviving spouse ("S") was sole beneficiary and sole trustee of the trust, with the power to withdraw all of the trust's assets and distribute them to herself.

First, the IRS quotes its own regulation:

"Section 1.408-8 of the regulations, Question and Answer 5, provides that 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. In order to make this election, the spouse must be the sole beneficiary of the IRA and have an unlimited right to withdraw amounts from the IRA. 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."  Emphasis added.

But then, the IRS rules exactly the opposite of what its own regulation provides!

The IRS rules that "…[Y]ou are to be treated as the payee and beneficiary of IRA X for purposes of Code sections 408(d)(1) and 408(d)(3).…For purposes of Code section 408(d)(3) and section 1.408-8 Question & Answer - 5 of the Income Tax Regulations…you may be treated as the beneficiary of Decedent A's IRA X so that the IRA X account balance may be transferred from Decedent A's IRA X into an IRA set up and maintained in your name…."


So, when a trust is named as beneficiary, the spousal election under § 408(d)(3) to treat the inherited IRA as her own is not available even if the surviving spouse is the sole beneficiary and trustee of the trust…except "when we the gods of the IRS declare that it really is available after all!"

[One more interesting note about this PLR: Both spouses were past their RBDs, but the PLR does not mention who if anyone took the 2005 and 2006 MRDs or how the 2006 MRD was computed. Thus, the IRS passed up the opportunity to clarify how the MRD for the year after the year of the participant's death is calculated when the surviving spouse, in that year, elects to treat the decedent's IRA as her own IRA and the spouse has passed her own RBD.]

We know that, for MRD purposes, her election is retroactive to the beginning of the year, so she calculates the MRD for that year as "owner" rather than as "beneficiary."

What we don't know is whether she calculates the MRD for that year using the account's actual prior year-end balance (even though the account belonged to the decedent as of the prior year-end; this would be the conservative interpretation), or whether the prior year-end account balance is "zero" because she didn't own the account as of the prior year-end (which seems like an unlikely rule, since it would allow the spouse to completely skip a year of MRDs). See Reg. § 1.408-8, A-5(a), fifth and sixth sentences, and ¶ 1.6.06(B) of Life and Death Planning for Retirement Benefits.]

The estate:  PLR 200644031 : This PLR is equally outrageous.

P died after his RBD, leaving his IRA to his estate. S was the sole executrix and sole residuary beneficiary. The legacies of all pre-residuary beneficiaries could be satisfied from the nonIRA assets.

As executrix, S had the authority to decide which beneficiary received which assets; she intended to allocate the entire IRA to herself in partial fulfillment of her residuary share, and then take distribution of it and roll it over to her own IRA.


From the ruling:

"Although not specifically stated in the regulations, a surviving spouse may not elect to treat the IRA of a decedent as his/her own if an estate is the beneficiary of the IRA even if the spouse is both the sole executor of the estate and also the sole beneficiary of the estate."

Well at least that's clear!

But then the IRS says:

"The facts above indicate that you are the sole executrix of Decedent A's estate and the sole residuary beneficiary thereof. Thus, upon Decedent A's death, pursuant to his will, you had the authority to pay yourself all of Decedent A's residuary estate including IRA X. Thus, no third party had any authority to preclude your receiving Decedent A's IRA X. Under the facts stated above, it is appropriate to treat you as the payee and beneficiary of IRA X for purposes of sections 408(d)(1) and 408(d)(3) of the Code." [Emphasis added.]

So being the sole executor and beneficiary of the decedent's estate is not sufficient to allow the surviving spouse to roll over the decedent's retirement benefits that are payable to the estate…except that actually it IS sufficient!

This nonlogic is the paradigm of "arbitrary and capricious" action by a government agency.  The IRS is saying,

"We have a rule: no rollover through an estate merely because spouse is sole beneficiary and executor. But for you, we will make a special interpretation of the law, that is 100% contradictory to our supposed rule, provided you pay us our $9,000 user fee to obtain a PLR."

If that's not what they're saying, then what are they saying?


The bureaucratic flimflam represented by the PLRs on spousal rollovers through an estate or trust has gone on long enough! After 17 years, the IRS owes it to taxpayers and practitioners to clean up its act and issue a Revenue Ruling or regulation stating its long-standing policy allowing spousal rollovers through an estate or trust in a form that taxpayers can rely on.

Many bereaved widows and widowers left trying to clean up the mess of an non-planned estate would appreciate it.


Natalie Choate

Edited by Steve Leimberg


 Steve Leimberg's Employee Benefits and Retirement Planning Newsletter # 397 (January 2, 2007) at   Copyright 2007 Leimberg Information Services, Inc. (LISI).  Reproduction in Any Form or Forwarding to Any Person Prohibited - Except With Specific Permission!


PLRs 2006-44028 and 2006-44031

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