Texas residents who inherited individual retirement accounts could possibly lose funds when it comes to property division in a divorce. New tax laws, which change the rules for awarding alimony, are silent on this as is the Internal Revenue Service, nor have there been any court rulings. Some people are using inherited IRA funds to offset the lost alimony deduction under the new tax laws.
Property inherited before or during a marriage is generally considered separate property and not subject to property division unless it is commingled with joint property, which could happen if the IRA beneficiary chooses to do this with withdrawn funds. IRAs cannot be jointly held. In an inherited IRA, the decedent's name remains on the account, and the beneficiary's name is added. The beneficiary may not make new contributions to this account, and distribution terms remain the same.
Some spouses are withdrawing funds from inherited accounts to fund a property division during their divorce. This might subject the beneficiary to taxes for early withdrawal unless the transfer of funds follows the same rules as ordinary IRA withdrawals. The courts must approve the transfer of any IRA funds as part of the property division settlement.
Since state laws vary on transferring inherited IRAs, Texans who have inherited one may want to consult with a divorce lawyer on whether this can be done. They might also want to find out if it is in their best interests to transfer inherited IRA funds as part of the property division and divorce settlement. An attorney may be able to handle the paperwork necessary to make the transfer.