Do property division laws apply to inherited IRA accounts?

IRA accounts have become a huge bargaining chip in divorce settlements, but what about IRAs received in an inheritance from a family member? Considering the new tax laws that go into effect in 2019, pretax funds from IRAs could be used to make up for tax deductions in a divorce settlement. Residents in California and other states have used inherited IRA accounts to satisfy property division in a divorce.

There are no IRS guidelines or official rulings that say whether an inherited IRA should be considered marital property. Property acquired before marriage and gifts or inheritances received during the marriage are considered separate property. Property may remain separate unless it is commingled or re-titled to include the spouse’s name.

IRA accounts are considered marital property if contributions are from funds earned during the marriage. It may seem like a cut-and-dry case of separate property for inherited IRAs since no new contributions can be made and they cannot be jointly owned. Even if deemed separate property, funds from the inherited account can be used as a settlement during a divorce. However, that may not be the case in how some states treat inherited IRAs.

California residents who have questions about IRA inheritance gifts may consider consulting with an attorney experienced in property division. A lawyer can first determine whether the account is marital property and, if so, assure the money is transferred from trustee to trustee according to the rules of the divorce decree. To avoid taxation, the same rules apply for splitting an inherited IRA or transferring an owned IRA.

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