Do you have an Individual Retirement Account (IRA) or a 401k? If you are remarrying or have already remarried and if you have grown children from a prior marriage, chances are you want the account – or a good portion of it – to end up with your children. To make sure that happens, good estate planning is essential, and an Interspousal IRA/401k Agreement can be solid pillar of your plan.
In this post we give you a typical example of how, without proper planning, a remarried person’s retirement account can end up in the wrong hands. We then go on to explain how an Interspousal IRA/401K Agreement works and how it can protect your children from a prior marriage.
How Your Retirement Plan Can End Up In The Wrong Hands
Mary and John were happily married for 30 years when John passed on. Mary inherited his $700,000 IRA. She then named their two grown children as death beneficiaries.
Mary had no desire to remarry, but six years later she met Fred, and they hit it off. Like Mary, he also had grown children from a prior marriage. Mary and Fred were grateful to have found one another after many lonely years. They trusted one another and neither saw the need for a premarital agreement.
With time, Mary began thinking about her IRA.What would happen if she died before Fred? She knew he could really use some of that money, and she wanted to provide for him. On the other hand, she and her first husband had always planned for their children to get anything left over. After a long talk with Fred, Mary decided to make Fred the beneficiary of the IRA. He promised that if he outlived her, he would name her children as death beneficiaries of the unused portion of the IRA. Fred had every intention of fulfilling his promise.
As it turns out, Fred did outlive Mary. She developed dementia. Fred spent five years at home ministering to his ailing wife’s needs. When she died, he inherited her IRA.
Having seen their father serve as their stepmother’s caregiver for so long, Fred’s children had a different idea about the IRA he had inherited: They urged him to keep all the money for himself, and to designate them as the death beneficiaries. After all, they pointed out, he had selflessly taken care of Mary for a very long time, and Mary’s children had provided little or no assistance during that time.
Deeply rattled over Mary’s death, exhausted from years of caregiving, and under pressure from his children, Fred ended up doing what his children wanted. He rolled Mary’s IRA into his own IRA. When he passed on, his children inherited it. Mary’s children got nothing.
How An Interspousal IRA/401k Protects Your Children From A Prior Marriage
Had Mary and Fred established an interspousal IRA Agreement, Mary would have had the best of both worlds: She could have provided for Fred and provided for her own children, too. The Interspousal IRA/401k Agreement is a written contract, and it can be created and executed before you remarry (premarital agreement) or after you are already married (postmarital).This is how Mary and Fred’s agreement would work:
- Mary agrees to leave her IRA to Fred if she dies first.
- Fred, the survivor, agrees to limit his withdrawals to his required minimum distributions, or to abide by some other formula for withdrawals that he and Mary agree upon.
- Fred agrees that once he inherits the account, he will make Mary’s children the death beneficiaries, irrevocably.
- Both Fred and Mary are entitled to their own legal counsel. However, if a couple is already married as Fred and Mary are, many choose to waive conflict of interest and use the same lawyer to draft the agreement.
- Mary’s children receive duplicate originals of the executed agreement. This makes her children aware that the agreement exists, and tells them what they are entitled to when their mother passes on.
- When Mary dies, Fred must provide proof to Mary’s children that he has named them as death beneficiaries of the account, irrevocably.
- When Fred dies, Mary’s children inherit whatever is left in the account.
Note: If both Mary and Fred had an IRA or 401k, the agreement could have been designed to protect both sets of children.
How Our Attorneys Help
Our attorneys can incorporate an Interspousal IRA/401k Agreement into a married couple’s initial estate planning. Or, if we have already created an estate plan for the couple, we can create the agreement later on and incorporate it into the existing plan. Like all estate planning documents, it must be worded precisely.
The typical situation we see in our practice is when one spouse or both spouses (or spouses-to-be) have a retirement account. They recognize that the funds from both accounts will be required to support the surviving spouse, but still want that their own children to inherit whatever is left over. An Interspousal IRA/401k Agreement can be an excellent legal tool under these circumstances.
If you are interested in exploring the protections of an Interspousal IRA/401k Agreement as part of the estate plan we are preparing for you, or have already prepared for you, contact our office for an appointment and we will be happy to meet with you to discuss it and advise you. Call 561-625-1100.
