Tax Planning for Retirees

Spouses and Other Beneficiaries: Part 2

Same-Sex Marriages Recognized for Federal Tax Purposes. – The U.S. Supreme Court has
held that same-sex marriages are valid marriages for all governmental purposes. Thus, for federal and state tax purposes, the terms “spouse,” “husband,” and “wife” generally include either individual in a same-sex marriage. (United States v. Windsor, 570 U.S. ___, 133 S. Ct. 2675, 186 L. Ed. 2d 808 (2013); Obergefell v. Hodges, ___ U.S. ___, 2015-1 U.S.T.C. ¶ 50,357 (S.Ct. 2015).) See Chapter 1 of the treatise.

Spousal Rollovers through a Trust. – A surviving spouse may roll over a qualified plan distribution received through a trust tax-free if the terms of the trust provide the spouse with the unconditional power to obtain the distributed funds. The spouse may roll over the plan funds even if the plan administrator erroneously paid them over to the retiree’s estate rather than to the trust over which the surviving spouse had unconditional power. (Ltr. Rul. 200905040.) See Chapters 2, 4, 5, and 6 of the treatise for a discussion of tax-free rollovers by surviving spouses.

Effect of Certain Life Annuity Elections on Spousal Annuity Requirements. – A qualified retirement plan may be required to provide a participant’s surviving spouse with an annuity payable over the spouse’s lifetime. However, the spousal annuity requirement generally does not apply to a participant in a profit-sharing or stock bonus plan if (1) any nonforfeitable benefit accrued at death is payable to the surviving spouse and (2) the participant has not elected a life annuity. The IRS has now ruled that a revocable election to invest in a contract providing a life annuity at retirement does not nullify this spousal annuity exception if ultimate annuity payments are based on the account balance and actuarial assumptions at the annuity starting date.

The IRS would deny the spousal annuity exception for this type of contract if the election were irrevocable. (Rev. Rul. 2012-3, 2012-1 C.B. 383.) See Chapter 2 of the treatise for a discussion of required spousal annuities.

Treatment of a Spouse’s Community Property Interest in an IRA Distribution to a Nonspousal Beneficiary. – The IRS has ruled that an IRA distribution to a nonspousal beneficiary may be taxable to the beneficiary even though the surviving spouse has enforceable property rights in the distributed funds under state community property laws. Proper planning for this anomaly might involve either (1) a lifetime conversion of the spouse’s community property rights into the separate property of the retiree or (2) designation of the surviving spouse as an IRA beneficiary to the extent of his or her community property rights. Or after decedent’s death, the nonspousal beneficiary might make a timely disclaimer of the IRA to the extent of the spouse’s community property interest. (Priv. Ltr. Rul. 201623001.) See Chapter 5 of the treatise for a discussion of community property interests in IRAs.

QDRO Survivorship Benefits Lost Due to Late Filing with Plan. – A QDRO generally cannot confer survivorship rights on a former spouse who did not file the QDRO with the plan until after QJSA payments had begun to the remarried participant. In such a case, the survivorship rights in the QJSA would have already vested in the spouse married to the participant when payments commenced. The QDRO could not thereafter require the plan to make additional payments to the former spouse, since such payments would not be a type or form of benefit otherwise
provided under the plan. (Langston v. Wilson McShane Corp., 828 N.W.2d 109 (Minn. 2013).)
See Chapter 2 of the treatise for a discussion of QDROs.