This week, we explain how the law affects retirement distributions for married couples, and why you need to be extra careful with your retirement planning if you’re in a blended family to ensure your retirement account assets go to the right people in the right amounts after you’re gone.
Be Aware of How ERISA Affects 401K Distributions
If you’ve remarried, you and your new spouse have probably talked about updating the beneficiary designations on your retirement accounts to reflect your blended family arrangement. (If you haven’t talked about it, you need to talk about it ASAP). Sometimes, people who are remarried decide to leave their retirement funds to their children from a prior marriage and leave other assets like their house and savings accounts to their current spouse. You may do this to avoid future conflict between your spouse and your children over your assets.
But even if you want to leave your retirement for just your children, if you’re married and your retirement account is a work-sponsored account, your children won’t inherit the entire account even if you name them as the sole beneficiaries.
That’s because the federal Employee Retirement Income Security Act (ERISA) governs most employer-sponsored pensions and retirement accounts. Under ERISA, if you’re married at the time of your death, your spouse is automatically entitled to receive 50% of the value of your employer-sponsored plan – even if your beneficiary designations say otherwise.
The only time your surviving spouse wouldn’t inherit half of your ERISA-governed retirement account is if your spouse signs an official spousal waiver saying they’re affirmatively waiving their right to inherit 50% of the account, or if the account beneficiary is a trust of which your spouse is a primary beneficiary.
IRAs Have Different Rules Than 401Ks
If you want your children to inherit more than 50% of your work-sponsored retirement benefits, and completing a spousal waiver isn’t an option, consider rolling the account into a personal IRA instead.
In contrast to 401(k)s and similar employer-sponsored plans, IRAs are controlled by state law instead of ERISA. That means your spouse isn’t automatically entitled to any part of your IRA.
When you roll a 401(k) into an IRA, you gain the flexibility to name anyone you choose as the designated beneficiary, with or without your spouse’s consent.
On the other hand, if you want to ensure your spouse receives half of your retirement savings, make sure to include them as a 50% beneficiary or better yet, have your individual retirement account payout to a trust instead. With a trust, you can:
● Document exactly how much of your retirement you want each of your loved ones to receive
● Control when they receive the funds outright
● Easily update and change the terms of your trust without having to remember to update your financial accounts.
Beneficiary Designations Always Trump Your Will
Whether you have an employer-sponsored 401K or an IRA you manage yourself, there is one critical rule everyone needs to know: beneficiary designations trump your will.
For example, if your will states that you want your retirement account to be passed on to your brother, but the beneficiary designation on the account says you want it to go to your sister, your sister will inherit the account, even though your will says otherwise.
Similarly, let’s imagine you get divorced and as part of your divorce decree your ex-spouse agrees they won’t have any right to your retirement fund. However, after the divorce, you forget to take their name off the beneficiary designation for the account. If you die before updating the beneficiary designation, your former spouse will inherit your retirement account.
If you forget to update your ERISA-controlled account and have remarried, your current spouse would receive half of the account and your former spouse would receive the other half. That’s why it’s so important to work with an estate planning attorney who can make sure your accounts are set up with the proper beneficiary designations and ensure your assets are passed on according to your wishes.
Work With An Attorney Who Makes Sure All Your Assets Will Be Passed On How You Want Them To
Understanding how the law affects different types of assets is essential to creating an estate plan. But there’s more to it than just having a lawyer – you need an attorney who takes the time to really understand your family and your assets so they can design a custom plan that achieves your goals for your assets and your legacy. To learn more about how we serve our clients differently than most lawyers, schedule a complimentary call with us. We’d be honored to share how our unique process can help your family.
AB Law, PLLC is a full-service business law and estate planning firm that serves clients throughout Texas. All consultations are free and no question is too silly, ridiculous, or complex. https://calendly.com/ablawpllc www.ab-firm.com