Divorce agreements in Ohio have been known to split IRAs between spouses that are calling it quits. However, some may assume that inherited IRAs are spared division because, like any separate asset, a single spouse is the recipient. However, that may not be enough to stop some judges from splitting an inherited IRA.
Investment News recently reported that court orders are being issued to divide inherited IRAs. There remains a lot of confusion about whether this is actually allowed because there is no official guidance on the matter. To date, there are no court cases that settle the issue of whether inherited IRAs may be split in a divorce, nor has the IRS provided any directives on the matter.
One of the central questions to splitting an inherited IRA is the IRA’s status as separate property. Several factors point to an inherited IRA being a separate asset:
- The account can only be owned separately and not jointly.
- The account cannot be contributed to.
- Asset appreciation was not actively contributed to by the other spouse.
It should be pointed out if the other spouse does actively manage the account, the appreciation acquired during the marriage might be considered marital property and become subject to division in divorce court. If the other spouse only contributes passively, a court is less likely to view that spouse as having anything to do with it.
One reason spouses may want to use inherited IRAs is to satisfy part of a divorce agreement. In some cases, a spouse may want to hold on to a business, a home or a piece of art, and is willing to provide a monetary settlement for it. But to do so, the spouse will have to tap into his or her IRA. If the transfer is carried out under the same rules as transferring ordinary IRA assets, it can bypass being taxed.
As with many developing legal issues, inherited IRA division in divorces will be subject to current events, so anything from a court decision to government regulation can change how courts treat inherited IRAs. And since Ohio law will also hold jurisdiction over dividing and distributing IRA funds in a divorce, your best bet is to consult with a knowledgeable divorce attorney on the matter of inherited IRAs.
This article is written to educate readers on complex property division in divorce and is not to be taken as legal advice.