Inherited IRAs and Divorce

I know this question is a bit off center but is there a good base of
experience whether Inherited IRAs (both TIRA and Roth) are typically
treated similarly or differently than first party IRAs by divorce courts?
This is really an effort for advance beneficiary planning with those future
beneficiaries living in IL, IN, and MI.
I suspect it’s near impossible to generalize (and probably further varies
by state and possibly within states), but since the logic behind a
first party IRA being divided in a divorce is obvious (ie accumulated while
a couple), it would seem inherited IRAs might be less susceptible (like
most inherited property I believe usually is).
Thanks for any advice.



In about 3/4 of the states, gifts and inheritances are not subject to equitable distribution (division upon divorce), though often the money is commingled so it’s difficult to trace it. In about 1/4 of the states, gifts and inheritances are subject to equitable distribution. I’m not familiar with Illinois, Indiana or Michigan specifically, though any lawyer in one of those states should be familiar with the rules in that state.

Since there’s no way to know where the beneficiaries will live at the time they get divorced, and since inheritances are often commingled (the inherited IRA, of course, can’t be commingled, but the distributions from the IRA can get commingled with the beneficiary’s other money), the safer approach is to leave the inheritance (both the IRA and the nonretirement assets) in trust rather than outright, unless the amount is too small to warrant administering a trust.

There are some special considerations in leaving IRAs in trust. See my article on this subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf .



Hi, I would like clarification regarding a similar situation.

I found the following excerpt from an Ed Slott blog:
[color=#BF0000][i]An inherited IRA is an item of IRD – income in respect of a decedent. This is money that was never taxed that was owed to someone who died. The beneficiary who inherits this income will have to pay the income tax owed. You can inherit IRD, but you cannot transfer it, gift it, or assign it. If you do, you will owe the income tax on it.

To get back to our inherited IRA and the ex-spouse, let’s say the ex-spouse was successful and was awarded one-half of the IRA in the divorce decree. What happens now? You have to request a distribution of one-half of the IRA, you have to pay the income tax on the distribution, and you give the funds to the ex-spouse. The ex-spouse now has cash – but no retirement plan. You have a tax bill, perhaps at a higher tax bracket, and you have lost one-half of your inherited IRA.

By IRA Technical Consultant Beverly DeVeny and Jared Trexler
*Copyright 2009 Ed Slott and Company, LLC[/i][/color]

Is my understanding correct… An inherited IRA, if granted to a soon-to-be ex through some type of divorce decree, cannot remain as a beneficiary IRA for the benefit of the ex-spouse the assets are being assigned to. Rather, that portion of the account would have to be distributed and would be treated as taxable income to the ex-spouse.



The blog quote is interesting.

However, assuming that the inherited IRA is transferred by court order in an equitable distribution case, my interpretation of the attached Regs is that such an involuntary transfer of the IRD asset (inherited IRA)is not the type of transfer that would trigger immediate taxation to the transferor. Note the examples of assignments where the transferee acquired the tax liability on the IRD, and I think that a court ordered transfer would be treated like the cited examples:

http://www.taxalmanac.org/index.php/Treasury_Regulations,_Subchapter_A,_…(a)-4

Of course, the blog might be correct, but this is the first I have heard of the concept that court assigned IRD would be treated differently than QDRO or IRA transfer pursuant to divorce would be. Perhaps there is some other citation out there that addresses this situation.



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