Using IRA Funds to Settle a Probate Dispute

Using IRA Funds to Settle a Probate Dispute

IRA Funds to Settle a Probate Dispute

Inherited IRAs can present a number of challenges. In Ozimkoski v. Commissioner, T.C. Memo. 2016-228, the court considered the tax implications of a withdraw from an inherited IRA that was used to settle a probate dispute with the couple’s son. The case shows what not to do when using IRA funds to settle a probate dispute.

Facts & Procedural History

The facts and procedural history of the case are as follows:

  • The taxpayer’s husband died and his will left all of his assets to the taxpayer.
  • The couple’s son contested the husband’s will.
  • The bank that held the husband’s IRA froze the account pending the outcome of the litigation.
  • The taxpayer eventually entered into a settlement agreement whereby her son was to be paid $110 thousand.
  • The bank transferred $235 thousand of the husband’s IRA into the taxpayer’s IRA.
  • The taxpayer then took at $141 distribution from her IRA and wrote a check to her son for $110 thousand settlement payment.
  • The taxpayer reported the $141 thousand distribution and paid tax on it. She did not report a 10 percent addition to tax on the $141 thousand distribution.
  • The IRS assessed a 10 percent additional tax on the $141 distribution from the taxpayer’s IRA.


The Tax and Addition to Tax for Early Withdrals

Taxpayers must pay tax on distributions they receive from IRAs. Taxpayers are also subject to a 10 percent additional tax on withdraws from IRAs if the withdraws are taken before the taxpayer reaches age 59-1/2. There is an exception to the 10 percent additional tax for withdraws by a surviving spouse from the deceased spouse’s IRA if the distributions are made due to the decedent’s death. The taxpayer argued that this exception applied and that she was not subject to the 10 percent additional tax. This was the primary issue addressed by the court.

As noted in the case, the courts have previously concluded that:

once the assets in the decedent’s IRA were transferred into the taxpayer’s IRA, any subsequent distributions were no longer occasioned by the decedent’s death and were not made to the taxpayer as a beneficiary of the decedent; therefore, the exception … did not apply.

In applying this rule, the court determined that the taxpayer was liable for the 10 percent additional tax.

Avoiding the Tax and 10 Percent Addition to Tax

With a little foresight, the taxpayer could have avoided the tax and the 10 percent addition to tax altogether. Had the taxpayer not transferred the $235 thousand to her account, but had instead left it in her husband’s IRA and paid the $110 thousand to her son directly from her husband’s IRA, she would not be subject to tax on the distribtion and the 10 percent penalty would not have applied.

The taxpayer could have rolled part of her husband’s IRA into an inherited IRA for her son. With this arrangement, the son would have had to start taking distributions from the IRA immediately or within 5 years and the distributions would be subject to tax. It appears that the taxpayer’s son was aware of this rule, as the son had told the bank that he did not want an inherited IRA. With the settlement, the son was able to receive $110 thousand free of any tax, while shifting the liability for the tax and addition to tax to his mother.

Call Now, We Can Help!


(713) 909-4906

Do you have a tax dispute, under audit by the IRS or state tax authorities, or just have a tax question? We want to hear from you. Call today for a free, confidential, consultation. If you are pressed for time, you can also use the contact form below to reach out to us.

Our Recent Reviews

Grga Brolih
Grga Brolih
09:20 24 Apr 17
I was a bit hesitant at first because I had not really done any research, just my friend told me about Houston Tax Attorney. Anyway i decided to give them a try and I was really impressed and pleased with the outcome of my experience. They were always very pleasant and professional and made me feel free from my tax issues. Good job!
Brown Jones
Brown Jones
08:54 10 Jun 17
Houston Tax Attorney has given me my life back. I was unable to pay my payroll taxes and in combination with the penalties attached to those taxes, my debt had begun to snowball. Houston Tax Attorney genuinely cares about their clients; they helped me throughout the process. I am extremely grateful to them.
Sandra Camacho
Sandra Camacho
03:47 27 May 17
I had a tax problem and needed help, so I went to Houston Tax Attorney. Love the team, they were so organized and communicated. Good work was done!
Turman Villanueva
Turman Villanueva
12:20 21 Apr 17
Dealing with Houston Tax Attorney was simple from the beginning to the end. Every person I spoke to was knowledgeable and helpful. I was guided in all aspects of the process and given the best advice regarding my tax condition. I have been given a second chance with the IRS. Thank you.
Bill Moore
Bill Moore
07:05 02 Jun 17
I want to Thank Houston Tax Attorney team. They took care of my IRS issues with great professionalism. No more sleepless nights. Thank you Guys!
Sharon G. Velasco
Sharon G. Velasco
08:31 24 Jun 17
I had some big tax issues and I was unable to handle it alone. Houston Tax Attorney helped me to settle all my tax problems. They were there all the way. I respect their professionalism and appreciate their commitment to their clients.
See All Reviews