Regardless of Age Surviving Spouse may Treat Deceased Spouse's IRA as Her Own including any Annuity Purchase
As the beneficiary of a deceased spouse's IRA, you possess an option exclusive to you. You may choose to handle your spouse's IRA as though it were your own. A recent IRS private ruling makes it clear that this choice is available even if the surviving spouse is over age 70½ at the time of his/her spouse's death. (IRS Letter Ruling 9704019)
Bob Jones possessed three IRAs at different banks when he died on February 16, 1995, survived by his wife, Ann. Bob had attained age 70½ in 1990 and was properly receiving required minimum distributions at the time of his death. Ann, who had reached age 70½ in 1989, was sole beneficiary of all three IRAs.
Age 70½ is critical when it comes to IRAs because an IRA owner must begin receiving distributions by April 1 of the year after he attains age 70½. The required distribution for the year after the individual attains age 70½ must be made by December 31 of that year and required distributions for succeeding years must be made by each December 31 based on the balance as of the prior December 31.
A surviving spouse of a deceased IRA owner can benefit by treating the IRA as her own. If she treats the IRA as her own, she can lower the minimum required distributions by naming a younger beneficiary.
In 1995, Ann, as beneficiary received distributions from each of Bob's IRAs in amounts sufficient to meet the minimum distribution requirement of Code Sec. 408(a)(6) and Code Sec. 401(a)(9). On December 8, 1995 the trustee of Bob's IRA at one bank requested the trustees of the other two IRAs to make trustee-to-trustee transfers, which they did. A week later, this single remaining IRA was re-designated as Ann's IRA. Ann intended to designate her four children as equal beneficiaries of the IRA and to take distributions in accordance with Code Sec. 408 (a)(6) and Code Sec. 401(a)(9)(A), commencing in 1996.Rulings: Ann sought and received the following rulings from IRS:
We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!
She lawfully claimed Bob's IRA as her own, even though at Bob's death both she and Bob had passed the requiring beginning date. The ruling said that there is no requirement that a surviving spouse not have reached the required beginning date to claim the IRA as the individual's own.
Her four children could properly be treated as designated beneficiaries for purposes of determining Ann's required minimum distribution date of December 31, 1996. While designated beneficiaries normally must be determined as of the required beginning date, Ann's required beginning date had already passed when she established the IRA as her own in 1995. Thus, in the absence of final regs, the ruling said it's a reasonable interpretation of the minimum distribution rules to allow the children to be designated beneficiaries. Since Ann's IRA first came into being in 1995 and distributions in a calendar year are based on the IRA balance as of December 31 of the prior year, her first required distribution date was December 31 of 1996.
No excise tax will be imposed under Code Sec. 4974 for post 1995 years for failing to take minimum distributions as long as Ann takes distributions over a period not extending beyond the joint life expectancy of herself and her designated beneficiary.
No Code Sec. 4974 tax applies for 1995. Although Ann set up the IRA in 1995 when she was over 70½, she didn't have to take distributions until December 31, 1996. Any required distribution for 1995 would have been based on the IRA balance as of December 31, 1994. Since the balance was $0 as of December 31, 1994 because the IRA didn't exist in Ann's name at that time, no distribution was required for 1995 and thus there could be no penalty tax for failing to take a distribution.