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Recent IRS Guidance Provides a Strong Reminder of the Advantages of Good Estate Planning

Even though the IRS Private Letter Ruling (the “PLR”) eventually favored a taxpayer’s surviving spouse, there are numerous reasons to make sure that proper planning is in place for IRAs. For IRA husband in the PLR, which was published in early June, left behind sizable retirement money. He never designated a beneficiary, which resulted in the IRA passing to his probate estate, which is an issue. The decedent’s wife was the only beneficiary and executor mentioned in his will, therefore the full IRA would transfer to her as part of the decedent’s probate estate.

Burdened Income Taxes

In general, any distribution from a retirement account that goes to a property or non-qualified organization must be made by the beneficiary via an inherited IRA within 5 years of the decedent’s passing, and it must be deducted from the beneficiary’s net earnings in the year of the payment being made. On the other hand, a retirement account that is left to a surviving spouse via beneficiary designation may be transferred over to the existing spouse’s own IRA and drained through mandated minimum payouts throughout the spouse’s life expectancy. Decades of tax-free prosperity and severely burdened income taxes may make a difference.

In this instance, the surviving spouse of the decedent preferred to receive her husband’s IRA as a marital rollover rather than as a passed-down IRA through an inheritance. To obtain her husband’s IRA through the necessary minimum distributions throughout her life expectancy, she asked for a private letter finding that she was allowed to roll the funds into her own IRA without including the payout as gross income.

Advantages Provided To The Surviving Spouse

In the PLR, the IRS stated that IRAs that pass through a third party, such as an estate, before being handed over to a beneficiary are typically regarded as passing to the recipients from the third party rather than from the deceased, preventing a spouse from picking the funds into her own IRA. However, the IRS determined in the PLR that since the surviving spouse was both the executor and the only beneficiary, “no third party can avoid the surviving partner from getting the entire value of the IRA as well as accepting the proceeds into the one who is surviving spouse’s own IRA,” and as a result, the estate can be overlooked and the partner can proceed as if she was the named beneficiary.

The PLR represents a typical circumstance that can be readily avoided, even though the final result is taxpayer-friendly. In this instance, the decedent’s wife experienced years of uncertainty and frustration as a result of the lack of preparedness, in addition to having to pay thousands of dollars in legitimate and IRS expenses. An IRA’s intended beneficiary will receive it directly with proper planning, and a surviving spouse will receive the advantages provided to spouses by the Internal Revenue Code and SECURE Act.

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