By Bill Harris, RMA®

For married couples, checking the status of beneficiary designations on your retirement accounts may seem like a small detail, but failure to do so has potentially far-reaching and expensive implications.

William Harris

Bill Harris, RMA

Mary’s husband passed away and she contacted her financial advisor seeking advice on how to access her husband’s IRA assets. A simple check revealed that, according to the current custodian of the asset in question, no beneficiary information was on file.

The custodian of their IRA had changed multiple times over the years and the current custodian claimed they had requested updated beneficiary information. Obviously, Mary had no knowledge or documentation of this. Like many people, the couple had assumed Mary had special rights afforded her by law that would allow her to access and rollover her spouse’s IRA as a sole beneficiary.

The lack of an updated beneficiary designation on her late husband’s IRA forced the assets into the estate and left the potential to be accessed by other heirs.

After a spouse has died is not the time any loved one wants to hear that, because beneficiary forms are outdated or missing, the surviving spouse is not recognized as eligible for rollover of IRA assets (to her own IRA or to an inherited IRA). Without correct and updated beneficiary information, the surviving spouse is at the mercy of the custodian’s IRA agreement, the IRS, or both.

This event happens quite frequently and many inheriting spouses have filed private letter rulings (PLRs) for relief. PLRs are costly. Filing a PLR for an IRA costs $10,000, plus thousands more in professional fees to file the ruling requests, and there is no guarantee the IRS will rule in their favor.

In circumstances where the spouse is the sole beneficiary and has complete control of funds, there is solid precedence for the IRS to allow spousal rollovers of IRA assets. This is not foolproof, however.

What is a Private Letter Ruling?

A private letter ruling (PLR) is a written decision by the Internal Revenue Service (IRS) that is sent in response to a taxpayer’s request for guidance on unusual circumstances or complex questions about their specific tax situation. A PLR is applicable only to the individual taxpayer and their particular situation at the time of the request.

The IRS can, however, issue a revenue ruling from a PLR (once the identifying taxpayer information is redacted) which becomes binding on all taxpayers. This does not require the IRS to rule in favor of PLRs exhibiting similar circumstances, however, as the IRS can revoke or modify a previously issued PLR if the ruling is deemed incorrect or inconsistent with the current position of the IRS.

In other words, relying on precedent from previously issued PLRs is risky to the taxpayer. Horror stories like the aforementioned are entirely avoidable if beneficiary designations are updated and accurate at all times.

Example of a Private Letter Ruling

PLR 201821008, released by the IRS in May 2018, is an interesting example of a PLR that allowed for a spousal rollover after the estate became the beneficiary of the deceased’s retirement assets.

The taxpayer – we’ll call him Preston – died in 2017 and was survived by his wife – we’ll call her Meg – and his children. Preston worked for the state and participated in the state’s retirement plan. Preston and Meg did not have an estate plan or a will and never named a beneficiary on the state retirement plan. This caused the retirement plan to go to the default beneficiary, Preston’s estate, after he passed away.

Under state law, Preston’s estate would have been payable to Meg and his children and his retirement assets would all be distributed, fully income taxable within five years. Luckily, Preston’s children disclaimed their interests in the estate, leaving Meg as the sole beneficiary.

Meg filed a PLR with the IRS requesting that she be allowed to rollover Preston’s state retirement plan assets to her own IRA because she was the sole spouse beneficiary. It would allow Meg to keep deferring taxes on retirement funds until she turns 72, at which point, she would take required minimum distributions (RMDs) based on her own life expectancy.

In this instance, Meg’s request was granted, provided the rollover was completed within 60 days after the date the distribution was made from the Plan. If the amount distributed was rolled into her IRA within this time limit, the assets would be excluded from her income under section 402(c)(1) of the Code.

This could not have occurred if Preston’s children had not disclaimed their share of Preston’s retirement assets, leaving Meg as the sole beneficiary. Had his children refused to disclaim their interest, a long, expensive, and painful legal battle could have ensued. Most likely ending with the IRA being forced to be cashed out within five years.

Despite the favorable ruling, the cost to Meg was probably high, with at least a $10,000 PLR filing fee, not to mention the accompanying professional services fees.

SECURE Act Warning

With the new Secure Act, it is currently unknown whether the IRS will allow a sole spouse to inherit via the estate and permit rollovers to their own IRAs. The creation of new classes of beneficiaries (Eligible Designated Beneficiary (EDB), non-Eligible Designated Beneficiary (NEDB) and Non-Designated Beneficiary (NDB) may throw a wrinkle in to previous PLRs, such as in the example above. This fact only underscores the importance of keeping your beneficiary forms updated.

About the author: Bill Harris, RMA®, CFP®

Bill Harris is a Retirement Management Advisor (RMA®), a CERTIFIED FINANCIAL PLANNER practitioner (CFP®), a Master Elite Ed Slott Advisor, and author of Inheriting Your Spouse’s IRA: The Widow's Guide to Keeping More of Her Assets. He is president of WH Cornerstone Investments, a financial advisory firm located in Massachusetts. Learn more at www.whcornerstone.com.

Read Harris's book on Retirement Daily: Inheriting Your Spouse's IRA: The Widow's Guide to Keeping More of Her Assets.