§408(d)(6)/§71(b)(2)(A) Issue

[chris]

I think I may have run a similar rabbit before, but in any event I wanted to see what the collective wisdom is. Husband and wife have signed off on a separation agreement (no court decree, no court order, just an agreement as to who's entitled to what property on account of the separation). Husband has agreed to transfer 1/2 of IRA to wife. Wife wants to rollover said 1/2. Wife's counsel has advised that there has to be a court order. The tie in §408(d)(6) refers to a "divorce or separation instrument described in subparagraph A of section 71 (b)(2)." Section 71(b)(2)(A) states "(A) a decree of divorce or separate maintenance or a written instrument incident to such a decree". I note that §408(d)(6) did not tie in subparagraph B of §71(b)(2) which is "a written separation agreement". Thus, it would appear that without a court order somewhere in the mix (eg, the court decree could later incorporate the written separation agreement?), the movement of 1/2 of husband's IRA to wife's IRA would be a taxable distribution to husband.

The legislative history (House Comm Report 101-247) regardng the change to §408(d)(6) seems to imply that the change in the language was to put IRA's on par with qualified plans as to the requirement of a QDRO. I also note that I ran across a number of third party research service materials which seemed to state that the IRA could be split pursuant to a divorce decree OR separation agreement and referred to all items under §71(b)(2). I do not know that they are exactly right based on the actual language of the Internal Revenue Code. However, I also note that the bank holding the IRA says a written separation agreement is fine (ie no need of a court decree). Anyone have any thoughts on this?

[jevd]

I think I may have run a similar rabbit before, but in any event I wanted to see what the collective wisdom is. Husband and wife have signed off on a separation agreement (no court decree, no court order, just an agreement as to who's entitled to what property on account of the separation). Husband has agreed to transfer 1/2 of IRA to wife. Wife wants to rollover said 1/2. Wife's counsel has advised that there has to be a court order. The tie in §408(d)(6) refers to a "divorce or separation instrument described in subparagraph A of section 71 (b)(2)." Section 71(b)(2)(A) states "(A) a decree of divorce or separate maintenance or a written instrument incident to such a decree". I note that §408(d)(6) did not tie in subparagraph B of §71(b)(2) which is "a written separation agreement". Thus, it would appear that without a court order somewhere in the mix (eg, the court decree could later incorporate the written separation agreement?), the movement of 1/2 of husband's IRA to wife's IRA would be a taxable distribution to husband.

The legislative history (House Comm Report 101-247) regardng the change to §408(d)(6) seems to imply that the change in the language was to put IRA's on par with qualified plans as to the requirement of a QDRO. I also note that I ran across a number of third party research service materials which seemed to state that the IRA could be split pursuant to a divorce decree OR separation agreement and referred to all items under §71(b)(2). I do not know that they are exactly right based on the actual language of the Internal Revenue Code. However, I also note that the bank holding the IRA says a written separation agreement is fine (ie no need of a court decree). Anyone have any thoughts on this?

Regardless of your interpertation of the above; the transaction, if done, must be done as a trustee to trustee transfer, otherwise it will be taxable to the husband and may be an excess contribution to the wife in an amount above the normal contribution limit.

[chris]

Thanks, jevd. I think both sides have that angle addressed. It's just the court decree issue noted above that is the problem...

[chris]

I ran acrss PLR 9344027. H and W signed off on a separation agreement w/no court order and did not represent to IRS that one would ever be obtained. IRS treated split of IRA's as taxable to H. In other words, written separation agreement in and of itself not enough....

[Appleby]

I don’t have those notes now, but I recall researching this in detail in order to respond to an attorney who challenged us on our position ( I worked with a brokerage clearing firm/custodian at the time). He felt the agreement was sufficient. In the end, he agreed with us that without a legal separation agreement or divorce decree signed by a judge, it would be a distribution to the IRA owner giving up the assets. If the recipient spouse credited the amount to her IRA, it would be treated as a regular IRA contribution, subject to the contribution limit in effect for the year.

[chris]

Take a look at http://www.msba.org/sec_comm/sections/fami...ansferofIRA.pdf which I found. It b asically sets out exactly what I have found and is where Appleby also appears to have ended up.....