Spousal Beneficiary Question

Submitted by Kevin O'Hearn on Tue, 2020-07-14 23:55

Hello, I hope all is well. If an IRA owner took an RMD distribution in January of 2020. He died a couple months ago and his spouse was the beneficiary and transferred the assets to her own IRA. Does she have the ability to roll the January RMD amount back into her own IRA by August 31, 2020?

Any assistance would be greatly appreciated. Thank you.

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Permalink Submitted by Alan - IRA critic on Wed, 2020-07-15 00:43

This will be tough to do. While the IRS has allowed a surviving spouse to do a 60 day rollover of the deceased spouse’s distribution in some prior letter rulings, many IRA custodians will require taxpayers to get their own PLR at a high cost (20k Est) and will not accept a rollover without it. While Notice 2020-51 eliminates the 60 day rollover period in favor of an 8/31 deadline, this is an added variable that could further discourage custodians from accepting such a rollover. She could always ask them, but is does not make sense to pursue her own PLR given the cost and time these take.

Permalink Submitted by Kevin O'Hearn on Wed, 2020-07-15 14:16

Thanks Alan for the quick response! If we assume that the IRA custodian will accept the rollover into the spouse’s IRA, do you think the IRS will have any issues with the rollover? My concerns would be the following:

The 1099-R for the distribution would reported under the deceased spouse’s SSN and the 5498 would be reported under the surviving spouse’s SSN.

The IRS generally requires contributions to be made to benefit the IRA owner, not a deceased person. My concern would be that the deceased spouse authorized the distribution when he was alive and the wife deciding to roll the funds back to her own IRA after he is deceased would not be an eligible rollover because it could be looked at as benefiting someone other than the IRA owner that initiated the original distribution.

I know the IRS allows distributions from a deceased spouse’s account to be rolled to the surviving spouse’s IRA, however I always interpreted this as distributions made after the decedent’s death to the spouse; not a distribution made by the decedent before they died. I would be curious to know your thoughts. Thanks!

Permalink Submitted by Alan - IRA critic on Wed, 2020-07-15 17:21

If the custodian accepts the rollover, it would have to be deposited into the deceased owner’s inherited IRA account which now has a 0 balance. The surviving spouse would then have to elect ownership and transfer the new balance to their own IRA, so this would be a 3 step process. But the 5498 would then match up with the 1099R if the custodian’s processing platform can handle these transactions. For the custodian, Notice 2020-51 requirements combined with using former PLRs for implied IRS approval makes this an even more challenging rollover than it would have been before.
If the IRS adopted this viewpoint they would not have ruled positively in the prior PLRs that allowed certain surviving spouses to do such rollovers. Therefore, the IRS apparently does not have a problem with this rollover benefiting the surviving spouse. Surviving spouses have received a wide variety of positive PLR Rulings over the years. Notes p 8-11 of the following paper from Natalie Choate:
https://www.epcnnj.org/assets/Councils/NorthernNewJersey-NJ/library/Death%26Taxes2019.pdf
Notice 2020-51 presents a new fact pattern, but it should ovecome any resistance due to 60 day rollover deadline. However, it will probably impede a custodian’s inclination to accept such a rollback directed by the decedent’s executor. There is also the question of whether the old inherited IRA would have to include the estate as beneficiary or could still show the spouse. Bottom line, there are many hoops to jump through for the custodian, any of which could torpedo the chance of such a rollover. The main hurdle presented by Notice 2020-51 is just the requirement to return RMDs to the distributing account, which may not be possible.

Permalink Submitted by [email protected] on Mon, 2020-08-03 14:37

I have a similiar situation to the one above, except that a husband who was 75 died in February 2020, before taking his RMD. The spouse completed a spousal rollover on the inherited IRA and took his 2020 RMD from her IRA. Even though it was technically his RMD, can she still return the distribution to her IRA (the distributing account) by August 31 under Notice 2020-51, assuming the custodian allows her to do so?

Permalink Submitted by Alan - IRA critic on Mon, 2020-08-03 16:38

She should be able to return it. Notice 2020-51 just refers to an RMD that would have been required and this distribution would have been required of her by the Regs. Actually, the return should be easier than if she had taken it from the inherited account which might now be closed and the custodian would have had to reopen it to receive the returned RMD.

Permalink Submitted by Bruce Steiner on Sat, 2020-07-18 15:42