Tax Planning for Retirees

Applicability of Community Property Laws

QDRO Distributions Taxed to Spouse Regardless of Community Property Laws. – A distribution from a retiree’s qualified retirement plan to the retiree’s spouse or former spouse under a court’s “qualified domestic relations order” (a QDRO) is generally taxable to the spouse. The Tax Court has held that community property laws of a state do not change this result – i.e., do not make the distribution taxable to the retiree. Seidel v. Commissioner, T.C. Memo 2005-67 (2005). See Chapter 2 of the treatise for a discussion of QDROS under qualified retirement plans.

Qualified Plan Distributions to Registered Domestic Partners in Certain Community Property States. – In a few community property states, community rules are also available for registered domestic partners. For those taxpayers, federal tax law generally treats their community income as earned one-half by each partner. Unfortunately, though, it is not clear whether distributions from the qualified retirement plans of such taxpayers should be treated as community income or separate income for federal tax purposes. That is, the rationale for federal preemption of community property rules otherwise applicable to plan distributions to married individuals does not appear to apply to registered domestic partners. (Ltr. Rul. 201021048; CCA 201021050; Boggs v. Boggs, 520 U.S. 833, 117 S. Ct. 1754, 138 L. Ed. 2d 45 (1997); IRS Publication 555.) See Chapter 2 of the treatise.

IRA Distributions to Married Individuals and Registered Domestic Partners in Community Property States. – The taxation of distributions from IRAs (and deductions for contributions to IRAs) are generally determined without regard to community property laws. Nevertheless, the IRS and several state courts have held that community property laws continue to apply to IRAs for testamentary and divorce purposes. These rulings and cases may also have some applicability to IRAs held by registered domestic partners in states that apply community property laws to such taxpayers. (I.R.C. §§ 219(f)(2), 408(g); In re Mundell, 124 Idaho 152, 857 P.2d 631, 633 (Idaho 1993); McVay v. McVay, 476 So. 2d 1070, 1073-1074 (La. Ct. App. 1985); Ltr. Rul. 201021048; CCA 201021050; Ltr. Rul. 8040101; FSA 199935055.) See Chapter 5 of the treatise.

Treatment of a Spouse’s Community Property Interest in an IRA Distribution to a Nonspousal Beneficiary. – The IRS has ruled that an IRA distribution to a nonspousal beneficiary may be taxable to the beneficiary even though the surviving spouse has enforceable property rights in the distributed funds under state community property laws. Proper planning for this anomaly might involve either (1) a lifetime conversion of the spouse’s community property rights into the separate property of the retiree or (2) designation of the surviving spouse as an IRA beneficiary to the extent of his or her community property rights. Or after decedent’s death, the nonspousal beneficiary might make a timely disclaimer of the IRA to the extent of the spouse’s community property interest. (Priv. Ltr. Rul. 201623001.) See Chapter 5 of the treatise for a discussion of community property interests in IRAs.