Wednesday, October 5, 2011

IRAs and Different State Provisions (3 of 3)

When many people think about the rules that govern IRAs, they see them as universal rules, applicable to everyone equally in all circumstances. While many rules do, in fact, apply to everyone equally, variations in state law can also create significant differences in how IRAs are treated in different states. In order to make sure your plan is as effective as possible, you should be sure it not only addresses Federal law, but the unique challenges that may arise as a result of the specific laws applicable in your state.

CLICK HERE to read Part 1 of this series

3) Property Rights
In general, property rights are determined at the State level and the federal tax rules are applied within the state property law framework. For example, in most states today, common law is used as the basis for property rights. Although variations and exceptions exist from state to state, common law generally provides that the owner of property is the person whose name appears on the ownership document, title, etc.

In contrast, about 20% of states use community property law or similar system as the basis for property rights. In these states, a spouse is generally treated as the owner of half of all the assets acquired during marriage, whether or not his or her name appears on ownership documents. Community property rules can create unique planning issues for IRA owners, particularly when the community spouses have different desired beneficiaries. These potential hurdles should be addressed as part of any retirement and/or estate plan.

By Jeffrey Levine and Jared Trexler
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*Copyright 2011 Ed Slott and Company, LLC