The IRS ruled privately that because a decedent had designated his estate as his IRA’s beneficiary at the time of his death, the IRA had no “designated beneficiary” for purposes of Code Sec. 401(a)(9) and the assets had to be paid out over the applicable distribution period in Reg. Sec. 1.401(a)(9)-5. The IRS also determined that a state court’s order retroactively amending the designation to list trusts as the beneficiaries was ineffective because retroactive reformations cannot change the tax consequences of a completed transaction. PLR 201628004.
Under the facts of PLR 201628004, a decedent maintained two individual retirement accounts (IRAs) with a custodian and worked with financial advisors who were employed by that custodian. Consistent with his overall estate plan, the decedent named one trust as a 50 percent beneficiary, and two other trusts each as 25 percent beneficiaries of the IRAs in a year after his required beginning date under Code Sec. 401(a)(9).
Later that year, the decedent’s financial advisors joined another firm and became affiliated with a different custodian, and the decedent met with one of the advisors to facilitate the transfer of the IRA assets to that custodian. The financial advisor provided a beneficiary designation form for the decedent’s signature, naming the decedent’s estate as the sole beneficiary. The decedent signed that form and the assets of the two IRAs held by the original custodian were directly transferred to a new IRA held by the new custodian.
Although the decedent signed the beneficiary designation form, he intended only to move assets from the first custodian to the second, and he did not intend to change beneficiaries as part of the transaction. After the decedent’s death, the trustees of the trusts petitioned a state court for a declaratory judgment that would modify the beneficiary designation for the new IRA to carry out the original estate plan (i.e. one trust as a 50 percent beneficiary, and the two other trusts each as 25 percent beneficiaries). Based on its finding of the decedent’s intent, the court granted the order, retroactively effective as if the designation were made on the date the decedent signed the beneficiary designation form for the new IRA.
The decedent’s estate requested a ruling from the IRS that the life expectancy (as set forth on the
Single Life Table at Reg. Sec.1.401(a)(9)-9, Q&A-1) of the beneficiary of one of the three trusts could be utilized to determine the Code Sec. 401(a)(9) “applicable distribution period” with respect to the portion of the IRA that was payable to that trust.
Reg. Sec. 1.408-8, Q&A-1(a) provides that an IRA is subject to the required minimum distribution rules provided in Code Sec. 401(a)(9). For purposes of applying these rules, the IRA trustee, custodian or issuer is treated as the plan administrator, and the IRA owner is substituted for the employee.
Reg. Sec. 1.401(a)(9)-4, Q&A-3 provides that only individuals may be designated beneficiaries for purposes of Code Sec. 401(a)(9). A person who is not an individual, such as the employee’s estate or a charitable organization, may not be a designated beneficiary. If a person other than an individual is designated as a beneficiary of an employee’s benefit, the employee will be treated as having no beneficiary for purposes of Code Sec. 401(a)(9), even if there are also individuals designated as beneficiaries. In addition, under Reg. Sec. 1.401(a)(9)-4, Q&A-4, in order to be a designated beneficiary an individual must be a beneficiary as of the date of the employee’s death.
Reg. Sec. 1.401(a)(9)-5, Q&A-5(c)(3) provides, in general, that with respect to an employee who does not have a designated beneficiary, the applicable distribution period measured by the employee’s remaining life expectancy is the life expectancy of the employee using the age of the employee as of the employee’s birthday in the calendar year of the employee’s death. In subsequent calendar years, the applicable distribution period is reduced by one for each calendar year that has elapsed after the calendar year of the employee’s death.
The IRS determined that because the decedent’s estate was named as the beneficiary of the IRA at the time of his death, and because an estate cannot qualify as a “designated beneficiary” for purposes of Code Sec. 401(a)(9), the IRA did not have a “designated beneficiary.” Because the decedent died after the required beginning date and without a “designated beneficiary,” the IRS ruled that the assets of the IRA must be paid out over the applicable distribution period described in Reg. Sec. 1.401(a)(9)-5, Q&A-5(c)(3).
The IRS noted that although the state court order changed the beneficiary of the IRA under state law, the order could not create a “designated beneficiary” for purposes of Code Sec. 401(a)(9).
The IRS observed that courts have held that the retroactive reformation of an instrument is not effective to change the tax consequences of a completed transaction. For example, the IRS said, the Tax Court considered the impact of a judicial reformation of a trust agreement for tax law purposes in Estate of La Meres v. Comm’r, 98 T.C. 294 (T.C. 1992). In La Meres, a state probate court order approved the post-death amendment of a trust to eliminate a provision that caused adverse estate tax results, and held that such amendment was retroactively effective as of the date of the decedent’s death. The Tax Court held that such reformation was not effective for tax purposes, explaining that while courts will look to local law in order to determine the nature of the interests provided under a trust document, courts are not bound to give effect to a local court order that modifies the dispositive provisions of the document after the IRS has acquired rights to tax revenues under its terms.