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Inherited IRAs and property division

| Jul 19, 2018 | Firm News, High Asset Divorce |

A California divorce requires the division of marital property, which often includes individual retirement accounts. These vehicles can only have one name on them, but a divorce generally treats retirement savings as marital assets. An IRA inherited by a person, however, could be classified as a nonmarital asset. Despite this status, some splitting couples have been dividing their inherited IRAs within their divorce settlements. Unfortunately, there are no Internal Revenue Code provisions that deal with this issue.

People have been bringing their inherited IRAs into the divorce process because they want to trade them for some other marital asset. The changes coming to the tax treatment of alimony beginning with divorces that are finalized in 2019 also appear to be driving this action because people might need funds without relying on alimony payments.

Cashing out the IRA directly would often result in taxes. To avoid this, people have their divorce decrees spell out the division of the account and reassignment of a portion to the ex-spouse. This process follows the same method for dividing regular IRAs, which prevents taxation through a trustee-to-trustee transfer.

A person with substantial assets who is entering the divorce process might want legal advice before making decisions like this or other financial choices. An attorney familiar with the issues surrounding a high-asset divorce could inform a person about acceptable methods for valuing assets like businesses, stocks, real estate and collectibles. Research about tax obligations upon distribution and separating non-marital assets from marital funds could provide a person with legal insights while negotiating the terms of a split.