Money Talks | August 2016

By Melissa Myers and Michael J. Tucker, August 2016 Issue.

Michael J. Tucker: Some clients continue to seek our legal and financial advice about the impact of getting married.

Melissa Myers: A few are even asking before they tie the knot!

Tucker: Yes, that’s particularly helpful in terms of timing.

Myers: A lot of couples had pent-up demand to get married as soon as they could, when same-sex marriage became legal in Arizona and then across the country.

Tucker: And other couples got married in order to gain particular benefits of marriage, such as spousal coverage under employer-provided health insurance or the ability to legally adopt their spouse’s minor children.

Myers: Now that the “dust has settled” a bit, what are some of the concerns that couples continue to raise?

Tucker: Some are concerned about marriage triggering legal or practical responsibility for the debts that their new spouse would bring to the marriage.

Myers: Certainly we’ve had clients expressing concern about the financial effect of divorce.

Tucker: They might have heard my sermon on community property.

Myers: Perhaps. Some individuals who have saved a long time for retirement are asking about the effect of a future divorce on their retirement benefits.

Tucker: Several rules in this area are not what people would expect.

Myers: And the rules are different depending on whether the retirement nest eggs are held in employer-sponsored benefit plans such as 401(k) plans, in individual retirement accounts (IRAs), in traditional pensions or otherwise.

Tucker: All 401(k) plans are subject to federal law that gives the spouse the right to inherit the 401(k) plan account if the employee dies.

Myers: The counterintuitive aspect is that this rule for 401(k) plans applies not only to the retirement nest egg accumulated during the marriage, but also to the money that was in the 401(k) plan account prior to the marriage.

Tucker: A couple of clients have been blindsided by the effect of this rule.

Myers: It’s possible, but not easy, to work around this default rule.

Tucker: That’s right. The spouse must consent in writing to the employee’s designation of a non-spouse beneficiary on the account.

Myers: Many clients imagine that they can handle this issue in a prenuptial agreement.

Tucker: That’s possible and it’s also procedurally burdensome and expensive. Also, many couples feel that prenuptial agreements are distasteful and unpleasant.

Myers: Certainly prenuptial agreements are expensive, because legally each party is required to have his or her own lawyer in the negotiation of the agreement.

Tucker: Getting married and protecting IRAs that were funded before the marriage is somewhat less complicated and burdensome.

Myers: More and more, IRA custodians are requiring the spouse to sign off if the IRA owner wants to designate a non-spouse beneficiary on the IRA.

Tucker: That’s based on Arizona community property law rather than federal retirement plan law. It’s a completely different chain of command with a similar result.

Myers: Let’s say that I want my beloved to get 100 percent of my retirement when I die. Is it better for her tax-wise if we’re married than if we’re not?

Tucker: Yes, generally, it’s quite a bit better. A surviving spouse can wait until she reaches 70-and-a-half years of age to start taking taxable distributions from her deceased spouse’s 401(k) or IRA.

Myers: That’s not the rule if they aren’t married to each other.

Tucker: Indeed not. A non-spouse beneficiary has to start withdrawing those taxable retirement benefits right away.

Myers: This, perhaps, isn’t a big deal if the surviving partner or spouse is going to need to take those distributions from the retirement nest egg anyway, in order to make ends meet.

Tucker: It’s a bigger deal for those surviving partners or spouses who wouldn’t need to withdraw that money in order to live on.

Myers: Why pay taxes now if you don’t have to?

Tucker: That’s a key concept. A tax dollar not paid today is a tax dollar not paid today.

Myers: If you’re married or in a long-term relationship, take a look at any available retirement benefits and consider who will receive those benefits if you don’t manage to spend all of them during your long and happy retirement.

Tucker: You can always consult your advisers to make this planning easier.

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