Keeping retirement accounts separated

[david rigby]

The following may or may not be hypothetical.

HE and SHE are considering becoming Husband and Wife.  Second marriage for both.  Both have adult children from first marriage.  Both age 70.  Both have investments that fall into the common categories:

a)   individual investments, such as stocks, bonds, mutual funds, none of which are part of an IRA or qualified plan.

b)   small cash accounts (checking, savings, CDs).

c)   retirement accounts, including all of the following: traditional IRA, Roth IRA, 403b plan (governmental), and 401a plan (ERISA-covered).  All retirement accounts are individual accounts, not defined benefit.  None of these accounts have reached Required Minimum Distribution.  All accounts existed long before HE and SHE met each other and have no potential beneficiaries other than children.  There are no real or potential QDROs.  All current accounts have named children as beneficiary(ies).

d)   There may be other property with small (but non-zero) value such as vehicle, artwork, real estate, antiques.

Both parties want the following to happen:

• Current retirement accounts will not be commingled.
• Upon the first to die, the retirement accounts and investments of the deceased will remain in existence and the income (and/or RMD) will be payable to (for the benefit of) the survivor.  The principal of the retirement accounts and investments would NOT be available to the surviving spouse unless the spouse's investments become exhausted.  Non-investment property (i.e., items that do not produce income) of the first-to-die (such as a car) might remain with the surviving spouse or go to the surviving children of the deceased (to be determined).
• Upon the death of the second, the ownership of all remaining investments (in all categories above) will pass to the children of the original owner.  For example, if HE dies first, at the time SHE dies, all of HIS investments and IRAs and accounts will become owned by HIS children, and all of HER investments and accounts will become owned by HER children.

What method(s) can be used to accomplish this?

Would the marriage automatically alter any beneficiary designations in effect for any of the above investments or accounts?

Does it require both pre-nuptial and ante-nuptial agreements to document the intent and actions?

What have I forgotten?

[Peter Gulia]

What each of “he” and “she” needs is to get work from a good estate-planning lawyer.

To get candid, unconflicted advice, each needs his or her own lawyer.

Planning of the kind your post describes is mainstream, and need not be expensive. That’s especially so for a client who is intelligent, educated, and well organized.

Much of what one might seek can be accomplished by supporting a retirement plan’s, IRA’s, or non-retirement investment’s beneficiary designation or transfer-on-death registration (or a bank account’s pay-on-death registration) with a premarital agreement or after-marriage consent and a trust (whenever and however created) to provide the differing beneficial interests a retirement plan’s, IRA’s, or investment’s beneficiary regime does not provide.

(I’ve never seen an employer’s retirement plan that restricts a beneficiary to an income-only distribution. And many or most retirement plans do not determine income in the sense of the fiduciary accounting concept of distinguishing between income and principal.)

For an ERISA-governed retirement plan, a good estate-planning lawyer would recognize that a premarital agreement alone is not enough for a qualified election (with the spouse’s consent) to negate an ERISA § 205 survivor annuity or death benefit.

For a governmental retirement plan, one would look to the plan’s provisions (which often are, but might not be, stated or explained in a comprehensive document or summary) to discern whether the plan provides a participant’s spouse a survivor annuity or other death benefit, whether one may elect out of that benefit, and what is required for a valid opt-out.

To simplify some planning and implementation steps, a participant entitled to an ERISA-governed retirement plan’s distribution might consider a rollover into a non-ERISA plan or IRA. Likewise, one might consider a rollover from a non-ERISA plan into an IRA. (There are several creditor-protection, investment, expense, and other factors that, depending on the surrounding facts and circumstances, might point in other directions.) Of the three retirement kinds—ERISA, governmental or church, or non-plan IRA, an IRA is most likely not to apply a protection for a spouse in the IRA’s administration.

(For a non-ERISA plan or IRA, that a protection is not applied in a plan’s or an IRA’s administration does not defeat whatever rights a spouse has under one or more States’ laws.)

For a trust that provides a surviving spouse income but not principal, one could design a trust so a trust’s beneficiary is treated as a designated beneficiary for a retirement plan’s or IRA’s minimum-distribution provisions. While the proposed rules do not yet apply (and are not even effective), one might design and document a trust to follow both the proposed and current rules.

If the spouses ever will or might reside in a community-property State (or otherwise invoke a community-property law), either or both might want a premarital agreement that undoes community property for some or all of the property interests.

If any State’s law for a spouse’s elective share might apply (which is almost everywhere in the USA if community-property law does not apply), either or both soon-to-be spouses might want a premarital agreement that undoes a surviving spouse’s elective-share right.

If either would-be spouse imagines a possibility of divorce before death, he or she might want a premarital agreement to specify what property division applies on the divorce.

Either would-be spouse might want a premarital agreement to specify how the spouses share or divide household and other living expenses.

If you have access to 403(b) Answer Book, 457 Answer Book, Governmental Plans Answer Book, Roth IRA Answer Book, or SIMPLE, SEP, and SARSEP Answer Book, my Beneficiary Designations chapter in each book gives a reader further details on many of these points.

Beyond the property-rights, tax, and other law issues involved, a good lawyer can help her client with practical aspects of the planning. This calls for foresight when the planning must or should consider the circumstances and personalities of his-and-hers families.

[CuseFan]

4 hours ago, Peter Gulia said:

What each of “he” and “she” needs is to get work from a good estate-planning lawyer.

To get candid, unconflicted advice, each needs his or her own lawyer.

10000000000%

[blguest]

On 7/27/2022 at 11:38 AM, david rigby said:

accounts and investments would NOT be available to the surviving spouse unless the spouse's investments become exhausted

That seems to me the trickiest part of your scenario David, and requires a creative and highly-competent estate counsel's input.

On 7/28/2022 at 6:17 AM, Peter Gulia said:

If the spouses ever will or might reside in a community-property State (or otherwise invoke a community-property law), either or both might want a premarital agreement that undoes community property for some or all of the property interests.

Every point Peter made is important. Certainly in a community property state, and likely some common law states as well, an anti-nuptial agreement is required to achieve some of these goals. In states where wills of nondeceased persons can be filed with the recorder or the court, the agreement should be filed along with the wills with the court having jurisdiction. 

The reasoning underlying anti-nuptial agreements (which the supreme court has also used in a QDRO context) is that some forms of property only arise in a marital context, and therefore a pre-marital agreement cannot address the disposition of that property as the couple involved do not have those rights to dispose of prior to marriage. It is also good practice to do so for older clients to help protect them from potential heirs' later claims of undue influence.

---

Edited to say, with egg on face, not only did I mean post-marital, not ante-nuptial, but unsupervised autocorrect compounded my error to make ante anti. The horror, heh, though all you polite people ignored the faux pas.

[Peter Gulia]

As I mentioned above, some retirement plans would require an after-marriage consent.

If a plan includes a provision ERISA § 205 requires (or a similar provision to get IRC § 401(a) tax-qualified treatment), a premarital agreement cannot be a spouse’s consent to waive those rights. Usually, a spouse’s consent must be signed by the spouse, and a person making a premarital agreement is not yet a spouse.

See ERISA § 205, 29 U.S.C. § 1055; 26 C.F.R. § 1.401(a)-20, Q&A-28.

See, for example:

Appeals courts

Hurwitz v. Sher, 982 F.2d 778 (2d Cir. 1992);

Hagwood v. Newton, 282 F.3d 285 (4th Cir. 2002);

Greenebaum Doll & McDonald PLLC v. Sandler, 2007 F. App’x 0822N (6th Cir. 2007);

Howard v. Branham & Baker Coal Co., 968 F.2d 1214 (6th Cir. 1992);

Pedro Enters. Inc. v. Perdue, 998 F.2d 491 (7th Cir. 1993);

National Auto Dealers & Assoc. Ret. Trust v. Arbeitman, 89 F.3d 496 (8th Cir. 1996);

Trial courts

Robins v. Geisel, 666 F. Supp. 2d 463, 467–468 (D.N.J. 2009);

John Deere Deferred Sav. Plan for Wage Employees v. Estate of Propst, No. 06 Civ. 1235, 42 Empl. Benefits Cas. (BL) 2076 (E.D. Wis. 2007);

Davis v. Adelphia Communications Corp., 475 F. Supp. 2d 600, 605-606 (W.D. Va. 2007);

Veolia Water Ret. Sav. Plan v. Smith, 2007 U.S. Dist. LEXIS 9754, 2007 WL 496425 (W.D. Va. Feb. 12, 2007);

Neidich v. Estate of Neidich, 222 F. Supp. 2d 357 (S.D.N.Y. 2002);

Ford Motor Co. v. Ross, 129 F. Supp. 2d 1070, 1073–1074 (E.D. Mich. 2001);

Callahan v. Hutsell, Callahan & Buchino, P.S.C. Revised Profit Sharing Plan, 813 F. Supp. 541 (W.D. Ky. 1992), vacated and remanded on other grounds, 14 F.3d 600 (6th Cir. 1993);

Nellis v. Boeing, No. 91 Civ. 1011, 15 Empl. Benefits Cas. (BL) 1651, 18 Fam. Law Rep. (BL) 1374 (D. Kan. 1992);

Zinn v. Donaldson Co., 799 F. Supp. 69 (D. Minn. 1992).