Category: IRAs
Tags: inheritance, Retirement, Tax, Asset Protection

Inherited IRA Ruling: Distinctions Between Federal and State Tax Law

Posted on: July 22nd, 2016
inherited IRAOur attorneys strive to share notable rulings and case law to help clients and other advisers understand how a court or officials might respond to a particular set of circumstances. A thorough understanding of the current state of federal and state legislation helps to ensure that appropriate asset protection and tax planning measures and strategies are in place. 

In early June 2016, Private Letter Ruling 201623001 rejected a woman’s request to rollover part of her son’s inherited individual retirement accounts (IRAs). Section 408(d)(3)(C) provides that non-spousal inherited IRAs are not eligible for rollovers. Only a surviving spouse can rollover an inherited IRA from their deceased spouse. However, the woman in the recent case had been assigned her son’s IRAs as community property under state law where she resides.

The woman acquired a portion of the son’s inherited IRAs pursuant to community property statutes after she filed a claim against her deceased husband’s estate. The decedent had named his son as beneficiary of the IRAs, but the woman filed a claim for fifty percent of the interest in the community property she had owned with the decedent. The state court approved the request and ordered that a portion of the son’s inherited IRAs be assigned to the woman as a spousal rollover. 

The woman requested several rulings from the Internal Revenue Service (IRS), two of which included distributing her interest in the inherited IRAs as a spousal rollover and exempting the rollover from tax. The IRS rejected all of the woman’s requests. As noted above, Section 408(d)(3)(C) does not permit rollovers from non-spousal inherited IRAs. The IRS cited 408(d)(3)(C) and the supporting provision in Section 408(d) which provides that state community property laws are disregarded for federal purposes in determining whether a spousal rollover is allowed.

Individuals who reside in a community property state should consider the ruling above as it reinforces that federal tax law does not mirror state tax law and vice versa. 

Interested in more planning details about inherited IRAs? Here are a few resources:
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