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IRA beneficiaries.

Generally, the beneficiaries of an individual retirement account (IRA) cannot roll over a decedent's IRA into their own; however, a surviving spouse who is a designated beneficiary of his or her decedent spouse's IRA can roll over the IRA tax-free. This rollover is not available if the decedent's IRA passes to the spouse through a third party. For example, if the decedent's IRA first passed through the decedent's estate, the Internal Revenue Service would treat it as having been acquired from a third party and the tax-free roll over would be denied.

In private letter ruling 9620038, a decedent left approximately $600,000 in trust and the rest of his estate to his wife. The taxpayer owned an IRA with a value of $616,000. The beneficiary, designation for the IRA read "as per estate." It appeared the wife would receive the IRA through a third party (the estate) and a tax-free rollover would be denied. However, the court said as per estate meant the proceeds would be paid directly to the decedent's wife as the designated beneficiary. The wife asked the IRS if she could roll over her husband's IRA into her own. Fortunately, service allowed the tax-free rollover despite the ambiguous beneficiary designation.

In private letter ruling 9604027, an individual named his daughter sole heir but beneficiary of his estate in his will built designated his estate as beneficiary of the IRA, Because his estate as the beneficiary, the IRS said that the entire IRA balance had to be distributed and taxed to his daughter in the year after his death. If he had named his daughter beneficiary of the IRA, it would have been distributed to his daughter and taxed over a period equaling their estimated joint lives, Similarly, a spouse who is named beneficiary can name a new beneficiary and defer taxes by having the IRA paid out over their estimated joint lives.

Observation: Taxpayers should identify the beneficiary by name, not as per estate. In private letter ruling 9604027, the decedent should have named his daughter, not his estate, as the beneficiary so that she could receive the annual distributions after his death. The daughter also would have been treated as a designated beneficiary of the IRA under proposed regulations 1.401(a)(9) if

* The decedent had had an irrevocable trust on the date the distribution began.

* The trust had been named as IRA beneficiary.

* The daughter was the trust beneficiary.

* The trust was valid under state law.

* A copy of the trust instrument had been provided to the plan's trustee or custodian.
COPYRIGHT 1996 American Institute of CPA's
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Article Details
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Title Annotation:individual retirement accounts
Author:Lynch, Michael
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Aug 1, 1996
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