Boggs and 403(b) accounts with Bypass Trust Planning

[Guest chriss]

In the case of a non-ERISA 403(B) account, does the Supreme Court's decision in Boggs v. Boggs limit my ability to utilize the account in a plan to fund the Bypass Trust of the non-participant spouse at death? Should these accounts be rolled into IRAs to increase planning flexibility?

[mbozek]

In Boggs the Supremes held that st cp laws were preempted in allowing the non employee spouse to transfer benefit rights to an ERISA qualfied plan under laws of inheritance, eg. if spouse owned 50% of benefits then spouse could convey that 50% via a will. In a non erisa 403(B) plan the spouse has a right to 50% of the account balance under the cp laws and presumably can assign it to his/her heirs. Therefore the bypass (B) trust for benefit of spouse could only be funded with the 50% of the 403(B) account that is owned by the employee. I dont know why funding the benefits through an IRA would be different under cp laws because the spouse will own 50% of the IRA. It appears that in a cp state spousal rights to 50% of marital property can limit the ability of an employee to utilize the $1m estate tax credit for transfering assets to a B trust It means that ee should fund the b trust with separate property to make the $1M credit. Example : ee has 500k in separate property and $1m in cp. Ee can transfer the 500k of separate property and and 500k in his cp interest to a b trust to use up the 1m unified credit for estate. If the plan is subject to ERISA then the entire 1m can be transferred to a b trust because there is no spousal interest. But remember retirement benefits can only be transferred at death.

Final Q: Why does the ee want to transfer ret benefits to a B trust. They are income assets not capital assets and there is no step up in basis at death to the trust as there would be for stocks. Only reason to fund b trust with pension benefits is that there are not enough capital assets to transfer to b trust to use up $1m unified credit.

Caveat: I do not practice law in a cp state so this just represents my understanding of how cp laws work. Also can spouse in cp state waive cp rights?

[Guest chriss]

The only purpose for utilizing the 403(B) accounts in the estate plan is to ensure full use of both spouses exemptions. Your response focuses on the ee funding 403(B) assets into the Bypass. Consider that the tougher challenge is to fully fund the Bypass of the non-ee spouse, where non-ee predeceases ee owning the cp interest in the 403(B) accounts.

Cp spouses can elect in writing for cp to be separate property. More recently in Texas, spouses can now elect in writing to make sp community property.

[mbozek]

yup- It seems that the non ee spouse needs to own $1 m in separate property to fund bypass trust.

[Guest chriss]

I don't necessarily agree with you. The heart of the issue is whether Boggs v. Boggs would preempt the non-ee spouse's estate from utilizing her interest in the 403(B) accounts to fund her Bypass Trust. If the case is not applicable, the spouses's cp property interest in the accounts should be available to fund the the trust.

[mbozek]

I thought that Boggs is limited to ERISA plans- benefits in a non ERISA plans including nonqualified deferred com and IRAs can be transferred in accordance with the st cp. rules.