Dealing with inherited IRAs during a divorce

| Jul 17, 2018 | Property Division |

Individual retirement accounts have long been an important asset and bargaining chip for divorcing spouses in New Jersey and around the country, but there are no regulations, official rulings or Internal Revenue Service guidelines dealing with how inherited IRAs should be handled during property division talks. However this has not prevented family law judges from approving divorce settlements that divide inherited IRAs, and IRA custodians, who may not wish to defy a court order, are complying with the provisions of these agreements.

This issue is likely to occur more frequently in the coming years due to changes in the way that alimony payments are taxed that go into effect in 2019. People that make alimony payments generally pay income tax at higher rates than their former husbands or wives, and the pretax funds in inherited IRAs may allow them to make up for the eliminated alimony deduction. However, this will usually involve people making a concession as inherited assets, like assets owned prior to a marriage, are generally considered separate and not part of the marital estate.

While adding marital funds to separate bank accounts could turn them into joint property, commingling is not a problem with inherited IRAs as no further contributions are possible. Some states have addressed this issue by passing laws that specifically deal with inherited IRAs. When inherited IRAs are divided during asset division negotiations, people being added to the account becomes responsible for taking future required minimum distributions in accordance with the percentage they are awarded.

Experienced family law attorneys may call upon financial planning experts and accountants when marital estates are complex, and they could encourage their clients to consider tax implications when making decisions about spousal support and property division. Litigating high-asset divorce cases is a public and often costly process, and attorneys may suggest alternatives to court, such as mediation, when traditional negotiations are at an impasse.



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