This post was authored by Salvatore M. Capizzi, Dunham's Chief Sales & Marketing Officer. If you have questions concerning today's topic, please call us at (858) 964 - 0500. Hold us to higher standards.

IRA owners often name their spouse as the beneficiary of their IRA and other qualified plans with the intent to provide for their spouse should the IRA owner be the first to die. This gives the surviving spouse the ability to place the inherited IRA in his or her own IRA and provides the surviving spouse a very powerful tax deferred benefit called a “stretch IRA.”

Naming Your Spouse as the Beneficiary: Eligibility for a Stretch IRA

A stretch IRA is when a beneficiary of an IRA is eligible to defer paying income tax on the inherited IRA, therefore stretching the IRA over his or her own life expectancy by taking smaller amounts each year, known as Required Minimum Distributions (RMD). A spouse is part of a group of people known as “Eligible Designated Beneficiaries” who can stretch an IRA.

This privilege of a stretch IRA is not available to most other non-spousal beneficiaries as the SECURE Act requires them to pay income tax on the inherited IRA no later than the end of the tenth year after the death of the IRA owner.

Arranging Beneficiaries of Your IRA in a Second Marriage: How You Could Potentially Disinherit Your Children

However, leaving your IRA to your spouse may be a problem if they remarry. The caution here is that assigning your spouse as the beneficiary may lead to disinheriting your children.

Let’s walk through a hypothetical situation.

Mary and John are married and in their late 60’s. Both have large IRAs accumulated through funding their IRAs to the max each year and participating in their company’s 401(K) plans. At retirement, the money from their 401(K) plans were rolled over into their respective IRAs.

They name each other as the primary beneficiary and their children as contingent beneficiaries.

Mary passes away and John, as the spousal beneficiary of Mary’s IRA, can then place her IRA into his IRA and stretch both IRAs over his lifetime.

Later, John falls in love and soon thereafter remarries.

Wanting to provide for his new wife, John names her as the primary beneficiary of his IRA – an IRA that now contains both his and Mary’s money. John’s new wife promises that should he pass away first, she will be certain that the assets of John’s IRA go to Mary and John’s children.

John passes away and his IRA is now passed to his wife from the second marriage.

His second marriage’s wife can name anyone she wants as the beneficiary of her new IRA. She names her own children as primary beneficiaries, thus bypassing Mary and John’s children completely and effectively disinheriting them from one of Mary and John’s largest assets.

Being in the business for as long as I have, I’ve learned this hypothetical situation is not all that uncommon and is a very unfortunate occurrence to the children from the first marriage.

Luckily, there is something that can be done to avoid this unintended outcome.

IRA Planning Technique Using an IRA Trust

Instead of John naming his new wife as the beneficiary of his IRA, John could consider establishing an IRA trust and naming the trust as the beneficiary of his IRA. In his IRA trust, John would name his new wife as the beneficiary and provide that she receives the Required Minimum Distributions (RMD) for her lifetime.

His trust would also specify that when his second wife dies, the trust assets revert back to Mary and John’s children, thereby allowing John to provide for his new wife but assuring that the assets go back to the rightful heirs for these assets – Mary and John’s children.

Having the money in a trust may also protect the assets from irresponsible spending from the second spouse, possible financial manipulation of the spouse by his or her family, creditors, lawsuits, and bankruptcy.

Preserve Your IRA with Dunham’s IRA Trust Trilogy

The Dunham Trust Company IRA Trust Trilogy® allows you to perform clear and precise planning for the specific needs of your client or prospect’s family.

To learn more about protecting your client’s IRAs, eliminating the SECURE Act tax at the end of the 10th year, or ways of replacing IRA assets lost to taxes, contact us today. You can call any of our regional directors or complete an online form on our contact page. We look forward to getting in touch.

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Disclosure: This document is provided for informational purposes only by DTC and should not be construed as legal and/or tax advice. DTC does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Risk and Fees Associated with the DTC IRA Trust Trilogy®: Trust may contain investment risk that could prevent completion. There is no guarantee that investment objectives will be reached. Special situation trust fees: No fees until the IRA owner passes. At which point trust Admin fee schedule that was approved at the time of setup will be used.

Risks and Fees Associated with all three trusts in the DTC IRA Trust Trilogy®: One of the factors as to whether or not a client should consider the trusts within the DTC IRA Trust Trilogy® is that current tax environments are subject to change at any time and no one can predict with certainty what Congress or the IRS may do.

Risk and Fees Associated with the DTC IRA Special Situations Trust®: Dunham Trust Company does not guarantee the investments in the DTC IRA Trust Trilogy® as investments will be subject to market conditions. Information made available to you are not intended as investment or tax advice. Dunham Trust Company does not guarantee that your investment objectives will be achieved.

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