Latest PLR: Spouse Was Not a Designated Beneficiary

The Facts:
An IRA owner died before his required beginning date (RBD) and he named a trust as his IRA beneficiary.

The Problems:
The IRA custodian didn’t have any paperwork regarding a trust and nobody had any evidence a trust ever even existed. When there is no designated beneficiary, the IRA custodial agreement default provisions apply. His surviving spouse wanted to treat the IRA as her own, an option only available to spouses who are designated beneficiaries. In this case however, the estate was the default beneficiary.

The Remedies Sought:
The surviving spouse sought court order to permit the IRA custodian to “designate” her as the IRA beneficiary. A state court order was granted but the IRA custodian still said no, insisting that their contractual default provisions apply. She then sought a private letter ruling (PLR).

The Results:
Request DENIED. The IRS agreed with IRA custodian saying, “The court order cannot create a “designated beneficiary” for purposes of Code Sec. 401(a)(9).” To add insult to injury, because the IRA owner died before age 70½, there was no “designated” beneficiary and the estate was the default beneficiary…the 5-year rule applied! This means the entire IRA must be fully distributed within 5 years, eliminating the opportunity for a multi-generational strategy.

The Lessons to Be Learned:
It is critical to make sure your beneficiary forms are up to date and filled out correctly. A mistake like this can cost your loved ones a lot of time and money – not all IRA errors can be fixed.

Source: PLR 201706004

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