2008 RMD if IRA divided during 2008 per divorce agreement

Submitted by [email protected] on Mon, 2008-12-15 19:51

I have a client that had his inherited IRA from his father divided and 25% transferred to the spouse via trustee to trustee transfer during 2008. When his 2008 RMD is calculated based on the 12/31/07 IRA value, is he required to take the 100% RMD or is the RMD amount split 75% – 25% between my client and his ex-spouse in proration to the split per the divorce agreement?



Submitted by Alan Spross on Mon, 2008-12-15 20:39

Perhaps this was a compromise settlement since an inherited IRA is not marital property, and could not have been contributed to with marital property.

The IRS does not care which party takes the RMD, but if the RMD was not addressed in the divorce agreement, they should split the RMD 75-25. The ex spouse must also continue the RMD schedule using the same divisor each year as your client, with their own prior year end balance.



Submitted by Barbara DiFranza on Sat, 2009-01-24 20:04

IRC 408(d)(6) “Transfer of account incident to divorce. -The transfer of an individual’s interest in an individual retirement account or an individual retirement annuity to his spouse or former spouse under a divorce or separation instrument described in subparagraph (A) of section 71(b)(2) is not to be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest at the time of the transfer is to be treated as an individual retirement account of such spouse, [u]and not of such individual[/u]. Thereafter such account or annuity for purposes of this subtitle is to be treated as maintained for the benefit of such spouse.”

It occurs to me that this is one of those situations where divorce gives divorcing parties a break (similar to the ability to take QDRO distributions without penalty prior to 59.5), by simply treating the IRA as hers and not his, irrespective of the inherited IRA provisions (which are in the same title). Perhaps you can cite to a regulation I’m not aware of.



Submitted by Al Fry on Sat, 2009-01-24 20:35

I think the primary rule here overrides the foregoing. An inherited IRA can never be transferred to one’s own IRA, or become one’s own IRA.



Submitted by Alan Spross on Sat, 2009-01-24 21:05

Are you suggesting that a non spouse inherited IRA can somehow be transformed into an owned IRA by a transfer incidental to divorce? The following is the IRS Reg that addresses these transfers:

>>>>>>>>>>>>>>>>
(g) Transfer incident to divorce—(1) General rule. The transfer of an individual’s interest, in whole or in part, in an individual retirement account, individual retirement annuity, or a retirement bond, to his former spouse under a valid divorce decree or a written instrument incident to such divorce shall not be considered to be a distribution from such an account or annuity to such individual or his former spouse; nor shall it be considered a taxable transfer by such individual to his former spouse notwithstanding any other provision of Subtitle A of the Code.

(2) Spousal account. The interest described in this paragraph (g) which is transferred to the former spouse shall be treated as an individual retirement account of such spouse if the interest is an individual retirement account; an individual retirement annuity of such spouse if such interest is an individual retirement annuity; and a retirement bond of such spouse if such interest is a retirement bond.
>>>>>>>>>>>>>>>>>

Note that while the original IRA owner’s interest is transferred in a non taxable transaction, there is nothing here to suggest that an interest that the transferor does not even possess is created by such transfor. Similarly, in a QDRO applying to a QRP, no rights or options are created for the alternate payee that did not exist under the plan for the employee.

Since an inherited IRA is not marital property in the first place, the Regs do not even address a marital settlement in which non marital property is transferred. Unless the IRS ruled to the contrary in a letter ruling, the transferee spouse should only be acquiring a share of the account in the same status that the transferor spouse had, ie a beneficiary interest under which the RMD would continue with the same schedule that applied to the transferor spouse.



Submitted by Barbara DiFranza on Sat, 2009-01-24 21:13

Ah, but what about the ability for a surviving spouse beneficiary of an inherited IRA to elect to “make it her own.” ?

And what about the sentence in 408(d)(6) quoted in my previous post that says “treated as retirement account of such spouse, and not of such individual.” ?



Submitted by Alan Spross on Sat, 2009-01-24 21:59

A spousal beneficiary of the deceased spouse can roll over that IRA, but this is different. There is no deceased spouse here and the IRA that is being transferred was never owned by the still living ex spouse, who only had a beneficiary interest in his father’s IRA.

With respect to 408(d)(6), it refers to the “transfer of an individual’s interest”. With an inherited IRA that interest is not that of an IRA owner, but only of that a beneficial interest. That’s my point, that no broader benefit can be transferred than that which the individual had, and he never did have an ownership interest in this IRA to transfer.

Are you the original poster with the transferor client?



Submitted by Barbara DiFranza on Sat, 2009-01-24 22:18

Am not the original poster, but the problem has been presented to me.

It’s more than a beneficial interest when you inherit something. It’s yours. The code says that the inherited item is yours with a burden attached–but with a specific exception for a surviving spouse.

I would say that the 408(d)(6) also creates a specific exception for a divorced spouse.

To quote your regulation: “The interest described in this paragraph (g) [size=75]{whatever that interest may be} [/size] which is transferred to the former spouse shall be treated as {[size=75]read “converted to”} [/size]an individual retirement account of such spouse.

The code does these nice things for former spouses. For example it says that a former spouse may be “treated as” a surviving spouse to extent that it is stated in a QDRO. So “treated as” is a pretty strong word.

As to the source being nonmarital property, this is a red herring. I know of no requirement that makes any of the “no-tax” statutes such as IRC 1041 and IRC 408(d)(6) require that the source of the transferred property be marital.



Submitted by Denise Appleby on Sun, 2009-01-25 19:02

[quote=”bdf”]Am not the original poster, but the problem has been presented to me.

It’s more than a beneficial interest when you inherit something. It’s yours. The code says that the inherited item is yours with a burden attached–but with a specific exception for a surviving spouse.

I would say that the 408(d)(6) also creates a specific exception for a divorced spouse.

To quote your regulation: “The interest described in this paragraph (g) [size=75]{whatever that interest may be} [/size] which is transferred to the former spouse shall be treated as {[size=75]read “converted to”} [/size]an individual retirement account of such spouse.

The code does these nice things for former spouses. For example it says that a former spouse may be “treated as” a surviving spouse to extent that it is stated in a QDRO. So “treated as” is a pretty strong word.

As to the source being nonmarital property, this is a red herring. I know of no requirement that makes any of the “no-tax” statutes such as IRC 1041 and IRC 408(d)(6) require that the source of the transferred property be marital.[/quote]

Good argument. But this person is not the surviving spouse of the IRA owner, so he/she does not have that right…which makes Alan and Al’s responses correct. Cites about ‘treating as own’ cannot apply to anyone other the person who is the syrviving spouse of the IRA owner



Submitted by Barbara DiFranza on Sun, 2009-01-25 21:24

I respectfully believe that you are being too conservative and refusing to understand the cleansing power of this wonderful little 408(d)(6) statute.

These two PLRs show that husband’s RMDs were reduced propotional to the 408(d)(6) transfers to ex Wife.

http://www.irs.gov/pub/irs-wd/0116056.pdf
http://www.irs.gov/pub/irs-wd/0027060.pdf

These three PLRs show that husband’s 72(t) payment requirements were reduced proportionately by his 408(d)(6)transfers to ex wife.

http://www.irs.gov/pub/irs-wd/0202074.pdf
http://www.irs.gov/pub/irs-wd/0202076.pdf
http://www.irs.gov/pub/irs-wd/0050046.pdf

The rulings rely on the language of 408(d)(6). I’ve found you authority. Please find me something concrete to support your arguments.



Submitted by Denise Appleby on Sun, 2009-01-25 21:48

[quote=”[email protected]“]I respectfully believe that you are being too conservative and refusing to understand the cleansing power of this wonderful little 408(d)(6) statute.

These two PLRs show that husband’s RMDs were reduced propotional to the 408(d)(6) transfers to ex Wife.

http://www.irs.gov/pub/irs-wd/0116056.pdf
http://www.irs.gov/pub/irs-wd/0027060.pdf

These three PLRs show that husband’s 72(t) payment requirements were reduced proportionately by his 408(d)(6)transfers to ex wife.

http://www.irs.gov/pub/irs-wd/0202074.pdf
http://www.irs.gov/pub/irs-wd/0202076.pdf
http://www.irs.gov/pub/irs-wd/0050046.pdf

The rulings rely on the language of 408(d)(6). I’ve found you authority. Please find me something concrete to support your arguments.[/quote]
These are separate issues. Your cites apply to IRA [u][b]owners [/b][/u]giving up part of their [u][b]own [/b][/u]IRAs to spouses/former spouses.
The OP asked about [i]non[/i]-spouse beneficiaries, and the responses provided by Alan and Al also apply to non-spouse beneficiaries.



Submitted by Barbara DiFranza on Sun, 2009-01-25 22:09

All property must be owned by someone. Agree or disagree.

A dead person cannot be the “owner”. Agree or disagree.

When he inherits, husband is the owner. Agree or disagree.

While he owns, he has the burden of the RMDs. Agree or disagree.

It is the same type of burden he would have (to make RMDs) if it were based on his age. Agree or disagree.

So why can the 408(d)(6) cleanse one burden and not the other?

Authority please.



Submitted by Al Fry on Sun, 2009-01-25 22:29

Looks like a trap for the unwary.



Submitted by Bruce Steiner on Mon, 2009-01-26 00:27

“Owner” has a special meaning here. If someone (other than your spouse) dies and leaves you his/her IRA, obviously you “own” the inherited IRA. But we call the decedent the “IRA owner,” you the “beneficiary” and the IRA an “inherited IRA,” to make it clear that you can’t make contributions to your inherited IRA, and that you have to begin taking distributions right away, over your life expectancy, rather than only after age 70 1/2 and over the joint and survivor life expectancy of yourself and someone 10 years younger than you.



Submitted by charles lore on Mon, 2009-01-26 01:49

So them is one conclusion that the inherited IRA is in fact marital property for purposes of divorce settlement?



Submitted by Bruce Steiner on Mon, 2009-01-26 02:14

Whether gifts and inheritances are marital property for purposes of equitable distribution varies from state to state. Gifts and inheritances are marital property in about 1/4 of the states. But one spouse could transdfer an asset that is not marital property to the other spouse in the context of an overall settlement.

I don’t see how this is relevant to the issues involved here.



Submitted by Al Fry on Mon, 2009-01-26 03:00

Not in IN. However many trade non-marital property for a greater interest in marital property.



Submitted by mk foss on Mon, 2009-01-26 03:36

Back to the original question. As Alan states someone must pay tax on the RMD that is required because it is an inherited or beneficiary IRA. An old private ruling (9011031) required the owner to base the RMD on the previous 12/31 balance even though half of the account was transferred to a former spouse during the next year.

Individuals taking Substantially Equal Periodic Payments over Life Expectancy to avoid the 10% penalty were allowed to reduce the amount after a portion of the account was required to be transferred to a former spouse – but I don’t think those rules are relevant for RMDs.

Another question would be, who actually received the payment. That person should pay the tax.



Submitted by Alan Spross on Mon, 2009-01-26 04:28

Interesting. A PLR from the distant past 🙂

If that PLR is still valid, then the transferor must take the full RMD in the year of the transfer, and the transferee has no RMD obligation for that year.

Another question pops up as well. If son inherits a parent’s IRA and in the following year the IRA is transferred in a marital settlement, is the transferee allowed to apply their own life expectancy due to the creation of separate accounts by the deadline? Or, since the transferee was not a designated beneficiary and received a spin off of a share of the transferor’s inherited IRA, are they required to take RMDs for years following the transfer using the life expectancy of the transferor?

Without a letter ruling I would think the latter would apply.



Submitted by mk foss on Mon, 2009-01-26 23:54

I agree with you Alan. I think that an inherited IRA transferred in a marital settlement agreement must be paid out over the life expectancy of the original beneficiary and not the person who actually received the account.

Titling also could be difficult.



Submitted by Denise Appleby on Tue, 2009-01-27 09:57

I agree as well.

Since there is no guidance on this specific issue, as it relates to titling, it may be safe to treat the receiving spouse as the ‘beneficiary'[i] for titling purposes[/i]- and register the account in the names of the decedent and the person for whom the inherited IRA is maintained . This would satisfy the requirements that [b](a)[/b] the name of the decedent being included in the title, so as to identify the person from whom the assets where [i]inherited [/i]and (b), the tax reporting being done in the name and TIN of the person who receives distributions.

Also, it seems PLR 9011031 is the most recent PLR to address this issue. I could find no PLR issued after which says differently. Considering the ‘designated beneficiary’ rule, which requires the individual to be a beneficiary on record at the time of death, in order for the individual’s life expectancy to be used, and the fact that the only provision for adjusting the previous year’s FMV are [url=http://www.retirementdictionary.com/outstanding_transfer.htm%5Doutstanding transfers[/url], [url=http://www.retirementdictionary.com/Outstanding_Rollover.htm%5Doutstanding rollovers[/url]and outstanding [url=http://www.retirementdictionary.com/Outstanding_recharacterization.htm%5Dr…, I also agree with Alan on who should take the RMD for the year of the transfer.



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