Can my spouse’s heirs take part of my IRA?
Many are fortunate to have an employer-based retirement plan, such as a 401(k), an Individual Retirement Account (IRA), or even both. After the house, a retirement account is often the largest asset a person owns upon their death. This article focuses on what can happen with a person’s IRA when their spouse dies.
First, it’s important to distinguish between types of retirement accounts. Most, but not all, employer-based retirement plans such as 401(k)s are subject to a federal law called the Employee Retirement Income Security Act of 1974 (ERISA). These retirement plans are often referred to as “qualified” in that they qualify for certain tax benefits under the IRS rules. If a married person wants to name someone other than their spouse as the beneficiary of their ERISA-governed plan, their spouse has to sign a waiver giving their permission. IRAs are not subject to ERISA, and although IRAs are tax-favored accounts subject to many of the same rules that apply to qualified retirement plans under ERISA, such as required minimum distribution rules, there are important differences.
One difference between ERISA-governed plans and IRAs is that a married person can name someone other than their spouse as the beneficiary of their IRA without their spouse having to give permission. Note that the designation of a beneficiary is unrelated to the spouse’s right to some portion of an IRA while both spouses are living, an issue that often arises in divorce, or the spouse’s interest in the IRA at death.
In Texas, a major difference between employer-based plans and IRAs has to do with community property rules. Texas is a community property state, where property acquired by either spouse during marriage, with a few exceptions, is considered community property and jointly owned by both spouses. When one spouse dies, the community estate is divided into two parts: one-half is the surviving spouse’s one-half share of what was the couple’s community property, and one-half is the deceased’s spouse’s estate’s share. Whether the deceased spouse’s estate passes to beneficiaries under a Will or to heirs according to the laws of descent and distribution, it is possible the estate will pass to someone other than the surviving spouse. The classic example is when the marriage is a second marriage and when one or both spouses have children from previous marriages.
Therefore, when the IRA owner’s spouse dies, just as the spouse had a community property interest in their spouse’s IRA when living, their estate now has a community property interest in it. This interest could be up to one half, depending on when the IRA was established. If the spouse dies without a Will and has children from a prior marriage, those children inherit the deceased spouse’s half of the community property. Similarly, if the deceased’s spouse’s Will leaves all the assets to his adult children from a prior marriage, those children now have a right to a portion of their stepmother’s IRA. When she dies, only her community property interest would pass to the beneficiaries she named. It is possible, but unlikely, that this is what the couple wanted. To avoid this scenario, first, it is important to have a Will. Second, if spouses wish for each other to keep 100% of their IRA, each of their Wills need to specifically include this bequest.
Retirement plans and accounts are governed by a complicated array of IRS and other federal regulations. Those unsure of the type of account they have should review their documents or contact their plan administrator, and seek the advice of tax and legal professionals for estate planning purposes.
You may visit our website at www.wrightabshire.com. Thank you to Wright Abshire associate attorney Theresa A. Clarke who contributed to the article. Wesley E. Wright and Molly Dear Abshire are attorneys with the firm Wright Abshire, Attorneys, A Professional Corporation with offices in Bellaire, and Carmine. Both are Board Certified by the Texas Board of Legal Specialization in Estate Planning and Probate Law and are certified as Elder Law Attorneys by the National Elder Law Foundation. Nothing contained in this publication should be considered as the rendering of legal advice to any person’s specific case but should be considered general information.