Application of IRC 408(g)

[J2D2]

IRC 408(g) states that "This section [408] shall be applied without regard to any community property laws." I'm trying to determine the proper application of that provision in the following situation.

Owner of IRA lives in a community property state and names spouse as sole primary beneficiary and adult child as sole contingent beneficiary of his traditional IRA. Owner dies and spouse timely executes a disclaimer of owner's interest in the IRA. Disclaimer goes on to recognize that the effect will be that the disclaimed property will pass as though spouse had predeceased the owner.

The result intended by the parties was that the spouse would retain a 50% intererst in the IRA, as the primary beneficiary [she disclaimed the community property portion] and that the remaining 50% would go to the adult child as contingent beneficiary.

Applying 408(g) to this situation, it would seem that there is no community property interest in the IRA. If that is the case, wouldn't the owner's interest in the IRA be 100%, rather than 50%, with the effect being that the spouse is waiving her entire interest in the IRA? The entire IRA would then pass to the contingent beneficiary, as though the primary benficiary [spouse] had predeceased the owner.

I'd welcome any thoughts on whether my read of 408(g) is accurate.

[mbozek]

IRC 408(g) states that "This section [408] shall be applied without regard to any community property laws." I'm trying to determine the proper application of that provision in the following situation.

Owner of IRA lives in a community property state and names spouse as sole primary beneficiary and adult child as sole contingent beneficiary of his traditional IRA. Owner dies and spouse timely executes a disclaimer of owner's interest in the IRA. Disclaimer goes on to recognize that the effect will be that the disclaimed property will pass as though spouse had predeceased the owner.

The result intended by the parties was that the spouse would retain a 50% intererst in the IRA, as the primary beneficiary [she disclaimed the community property portion] and that the remaining 50% would go to the adult child as contingent beneficiary.

Applying 408(g) to this situation, it would seem that there is no community property interest in the IRA. If that is the case, wouldn't the owner's interest in the IRA be 100%, rather than 50%, with the effect being that the spouse is waiving her entire interest in the IRA? The entire IRA would then pass to the contingent beneficiary, as though the primary benficiary [spouse] had predeceased the owner.

I'd welcome any thoughts on whether my read of 408(g) is accurate.

There are two different laws in play here. Under state community property laws each spouse is deemed to own 50% of assets acquired during the marriage. Therefore the IRA owner usually cannot designate a non spouse beneficiary of more than 50% of his IRA without spousal consent.

However for federal tax purposes IRC 408(g) provides that all of the income distributed from the IRA will be taxed to the IRA owner instead of 50% to each spouse that would apply if state community property laws were applicable.

From the facts above it appears that what has happened is that spouse was sole beneficiary of the IRA which is permitted under CP law and has disclaimed husband's 50% community property interest in his IRA which is no different than if a spouse in a non community property state disclaimed 50% of the entire value of the IRA in favor of a successor beneficiary. Spouse will be taxed on all distributions from the 50% of the IRA that she did not disclaim.

Tax advisor familar with CP needs to review the facts to confirm that spouse has properly disclaimed 50% of interest in IRA.