DAMNED IF YOU DO; DAMNED IF YOU DON’T (More Trouble with IRAs in Community Property States)

Isaac and Dorothy Boggs were happily married with three sons and resided in Louisiana.  When Dorothy became ill and suddenly died in 1979, the family was grief stricken.  Isaac, who was a career businessman, mustered up the strength to move on and eventually married Sandra Boggs.  Isaac retired from his long and fruitful career in 1986 (not long after his second marriage), but died three years later in 1989.

Isaac was survived by his second wife, Sandra, and his three sons from his first marriage, Thomas, Harry and David. Isaac owned an IRA and other pension plan benefits when he died. When it was discovered that Isaac named Sandra – his second wife – as the beneficiary of his IRA, his sons took issue and filed a lawsuit.  They basically claimed to own their mother’s (Dorothy’s) one-half interest in the IRA as former community property.

When Dorothy died in 1979, she had a Last Will and Testament that left Isaac a lifetime usufruct (i.e., the use) of her one-half interest in all community property with the remainder (a/k/a “naked ownership” or what is left after Issac’s lifetime) to her three sons, Thomas, Harry and David.  The sons claimed that the usufruct terminated upon the death of Issac vesting them with full ownership of Dorothy’s interest in community property, including the IRA (and other pension plan benefits).  The problem was that Dorothy’s Last Will and Testament conflicted with Isaac’s beneficiary designation in the IRA, which named Sandra – his surviving spouse – as the sole beneficiary of the IRA.

The issue eventually made its way to the United States Supreme Court which was called to decide whether the beneficiary designation of an IRA (or pension plan) can override a Last Will and Testament.  This is a true story. Boggs v. Boggs, 520 U.S. 833 (1997)  The United States Supreme Court agreed with the sons with respect to the IRA and essentially held that the community property interest of a non-participant spouse (i.e., Dorothy) in an IRA is not transferable to a second spouse in the event the participant spouse (i.e., Isaac) remarries. As such, one-half of the IRA belonged to the sons even though the beneficiary designation directed the entire IRA to Sandra (the second spouse).  The Boggs case is very well known in Louisiana estate planning circles because it can cause major problems where one spouse brings an IRA to a second marriage, which is a common scenario.

To add fuel to the fire, the IRS recently issued a new Private Letter Ruling 201623001 which extends and compounds the problem of an inherited IRA. In early June of 2016, the IRS rejected a request for a spousal “rollover” of an inherited IRA acquired through community property laws.  In PLR 201623001, a husband named his son (not his first wife / surviving spouse) as the beneficiary of his IRA.  After the husband died, the surviving spouse thereafter claimed to be the owner of a one-half community property interest in the IRA based on the Boggs case.  The state court agreed and assigned a one-half (1/2) interest in the son’s inherited IRA to his mother, which was a good result for the mother.  The kicker is that the IRS denied the mother’s request for a “spousal rollover” of her interest in her husband’s IRA, which is common practice and avoids a huge income tax event. Because the deceased husband did not name his spouse as the beneficiary, the IRS took the position that the surviving spouse received her community property interest in the IRA from her son – not her husband – and denied the rollover request, which triggered a tremendous income tax problem for the surviving spouse.

The case of Boggs and PLR 201623001 are two sides of the same coin and should always be kept in mind when planning with an IRA in Louisiana.  If the non-participant spouse dies first (i.e., the Dorothy/Issac Boggs situation), this raises a certain set of problems.  Conversely, if the participant spouse dies first, this potentially raises the PLR 201623001 problem with an IRA.

It is important to keep in mind that state law and Federal law do not mirror each other.  Always take care to review beneficiary designations carefully to minimize or avoid problems with an IRA in a community property state like Louisiana.

Theus Law Offices provides a complete range of estate planning services, including wills, trusts, probate, successions, estate administration and probate litigation. If you are facing an estate planning issue or will contest and need a Louisiana estate planning attorney, estate lawyer or probate attorney in Alexandria, Lafayette, Lake Charles, Baton Rouge, New Orleans, Shreveport, Monroe, Central Louisiana or elsewhere, let our estate planning lawyers and probate attorneys help you.