Blended families present a unique set of challenges when designating retirement account beneficiaries. When done correctly, carefully selecting retirement account beneficiaries in a second marriage can help ensure your wishes are met and result in additional returns along the way. However, failing to update beneficiaries can leave loved ones in the cold. We highlighted a few considerations that individuals and families in this situation should keep in mind.
Individual retirement accounts (IRA) are retirement accounts held at financial institutions, rather than with an employer. Be aware that IRAs often will have both the second spouse and children from the first marriage listed as primary beneficiaries. If the spouses are close in age, the IRA owner will use the Uniform Life Expectancy table to calculate the required minimum distribution (RMD). If the second spouse is at least 10 years younger than the account owner, they could use the Joint Life and Last Survivor Life Expectancy Table to calculate the RMD, which could result in lower taxable distributions. However, listing both the children and spouse as primary beneficiaries makes the Joint Life and Last Survivor Life Expectancy Table unavailable.
If you don’t need your entire RMD, consider splitting the IRA and designating the second spouse as beneficiary of one and your children as the beneficiary of the other. The IRA with your spouse as beneficiary will have a lower RMD through the Joint Life and Last Survivor Life Expectancy Table. This will reduce the overall RMD, thereby allowing more money to remain in the IRA and grow tax-deferred.
Lastly, it’s integral to regularly review IRA beneficiary designations, as state law trumps decedent’s intent and can potentially pose problems. In one case where a child was the primary beneficiary, the state court awarded the IRA distributions to the surviving spouse pursuant to her community property rights. However, the IRS concluded that even though the surviving spouse would receive the IRA distributions pursuant to the state court order, the IRS would continue to view the child as the beneficiary. Thus, distributions to the surviving spouse will be taxed to the child.
In addition to retirement account beneficiary considerations, there are other financial and estate matters blended families should closely watch. Read more in a recent feature from BKD Wealth Advisors Director Steve Martin in The Wall Street Journal, “How to Help High-Net-Worth Clients Plan for Blended Families.”