If you’re part of a blended family (meaning you are married with children from a prior marriage in the mix), you’re no stranger to the extra considerations and planning it takes to keep your family’s life running smoothly – from which parent your children will be with for the holidays to figuring out the schedule for a much-needed family vacation. You’ve also probably thought about what you want to happen to your assets and family if something happens to you.
But you might not have realized this: If you don’t create a plan for your assets before you die, the law has its own plan for you that might not reflect your wishes for your assets, especially your retirement assets. And if you’re in a blended family, this can have a significant financial impact on the ones you love and even create expensive, long-term conflict.
This week, we explain how the law affects retirement distributions for married couples and why you must 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 401(k) Distributions
If you’ve remarried, you and your new spouse have probably discussed updating the beneficiary designations on your retirement accounts to reflect your blended family arrangement. (If you haven’t discussed it, you must discuss it ASAP). Sometimes, remarried people 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 work-sponsored, your children won’t inherit the entire account even if you name them 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 percent of the value of your employer-sponsored plan – even if your beneficiary designations say otherwise.
The only time that your surviving spouse would not inherit half of your ERISA-governed retirement account is if your spouse signs an official Spousal Waiver saying they are affirmatively waiving their right to inherit 50 percent of the account, or if the account beneficiary is a Trust of which your spouse is a primary beneficiary.
IRAs Have Different Rules Than 401(k)s
If you want your children to inherit more than 50 percent 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, state law, instead of ERISA, controls IRAs. That means that your spouse is not 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, include them as a 50 percent 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 401(k) or an IRA you manage yourself, there is one critical rule that everyone needs to know: beneficiary designations trump your Will.
A Will is an important estate planning tool, but most people don’t know that beneficiary designations override whatever your Will says about a particular asset.
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 that you get divorced, and as part of your divorce decree, your ex-spouse agrees that they will not have any right to your retirement fund. However, you forget to remove their name from the account’s beneficiary designation after the divorce. 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 will receive half of the account, and your former spouse will receive the other half. That’s why it’s so important to work with an estate planning attorney who can ensure your accounts are set up with the proper beneficiary designations and that 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.
That’s why we help our clients create an inventory of all their assets to ensure that every asset they hold is accounted for and passed on to their loved ones exactly as they want it to.
We would be honored to help you protect everything you own and everyone you love through our heart-centered estate planning services. To learn more and to get started today, schedule a complimentary call with our office by emailing [email protected] or calling (859) 344-6742.
This article is a service of Ruberg Law PLLC. We don’t just draft documents; we ensure you make informed, empowered decisions about life and death for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™. During the session, you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this valuable session at no charge.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you seek legal advice specific to your needs, such advice services must be obtained independently, separate from this educational material.
