Friday, July 15, 2016

State Court Retroactive Change to IRA Beneficiary Not Given Tax Effect by IRS

A decedent had 2 IRAs. The death beneficiaries of the IRAs were trusts that qualified as "look through" trusts, such that the payout period for the IRAs after the decedent died could be computed using the life expectancy of the trust beneficiaries.

However, before he died, the decedent moved the IRAs to another firm, and entered into new paperwork that  erroneously designated his estate as the death beneficiary. With the estate as beneficiary, the payout period for the IRAs could not be "stretched" under IRS regulations The decedent thereafter died.

The trustees of the trusts petitioned a state court for a declaratory judgment to change the beneficiary designations back to the trusts. The court agreed and ordered the change, retroactive to the date the new beneficiary designation forms were signed.

A private letter ruling was then sought to give effect to the state court order, such that the IRA payouts could be calculated based on the life expectancy of the trust beneficiaries. The IRS declined, and ruled that the state court order could NOT retroactively change the tax consequences of the decedent having died with his IRA beneficiaries being designated to be his estate.

The IRS relied on Estate of La Meres v. Comm., 98 TC 294 (T.C. 1992). In that case, a state probate court order approved a post-death amendment of a trust to eliminate a provision that caused adverse estate tax results, and held that such amendment was retroactive to the date of the decedents death. The Tax Court held such reformation ineffective for tax purposes, explaining that courts generally disregard the retroactive effect of state court decrees for Federal tax purposes.

This is not the first time the IRS has ruled against giving tax effect for IRA stretch purposes of a retroactive reformation See PLR 201021038 for example. Interestingly, the IRS had previously given effect to such reformations - see PLRs 200235038 and 200620026.

Private Letter Ruling 201628004, July 8, 2016

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