Under Internal Revenue Service (IRS) rules, a distribution from an eligible retirement plan of a deceased employee made to a designated beneficiary may be treated as an eligible rollover. A non-designated beneficiary, generally, cannot get the benefits of a rollover. However, in a Private Letter Ruling (PLR), the IRS resolved an account holder's failure to properly designate a beneficiary by allowing the surviving spouse to rollover the funds to her own IRA.
In PLR 201821008, dated February 22, 2018, the IRS ruled on a taxpayer's ability to roll over a distribution from a deceased spouse's account into the individual's personal retirement plan, even though the distribution was initially paid out to the estate.
The decedent was a participant in an eligible 457 retirement plan and died before reaching the age of distribution. The decedent did not designate a beneficiary under the retirement plan, making the decedent's estate the beneficiary of the account. After his death, the account was distributed to the decedent's estate in a lump sum and subject to state and federal taxes.
The surviving spouse was the executor and sole beneficiary of the estate. The spouse distributed the remainder of the account payment to herself as sole beneficiary. The spouse then deposited the amount into a traditional IRA within 60 days of the distribution.
If the spouse was named as the beneficiary in the retirement plan, the spouse would be considered a designated beneficiary and may be eligible to rollover the payment. To the contrary, the decedent's estate would be considered a non-designated beneficiary and not eligible for the same rollover benefits.
The IRS concluded that the taxpayer can be treated as having received the distribution from the plan which was eligible to be rolled over into a personal IRA account. The taxpayer was not required to include the rollover amount in her gross income for federal tax purposes because she rolled over the qualifying amount within the necessary timeline.
The Private Letter Ruling highlights two important points. First, it is important to designate a beneficiary for employee retirement accounts and other benefits. This will allow the named beneficiary to take advantage of significant tax benefits. Second, it is also important to update the beneficiaries as necessary after a major life event, such as a death, divorce, marriage, or birth. Failing to designate a beneficiary could result in costly tax treatment or tax litigation with the IRS.
If you have any questions about what happens if the deceased fails to designate a beneficiary, the law firm of Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm focusing its law practice on employee benefits law. Contact our office today with any questions on how we can help you handle tax and benefits issues.