The IRA Beneficiary In A Second Marriage

In 1950, the divorce rate in the United States for those in the top 10% of American net worth was just 6%. By 2010, the divorce rate for the same demographic ballooned to 26%. What is one of the consequences of this trend? People with hundreds of thousands or more in retirement accounts are getting divorced, remarried, and trying to figure out the best way to plan an estate that includes a new spouse and children from a prior marriage.

The obvious, dangerous mistake that some otherwise savvy people make is that they name their new spouse as the primary beneficiary on an IRA account and then name the children from a prior marriage as the contingent/alternative beneficiary when their intent is to have their kids receive some type of remainder after their new spouse dies.

Shriek! Silence of the lamb horror sound!

Filling out a form in this manner gives the new spouse everything and places no obligation upon the new spouse to give the prior kids any assets from the IRA. A contingent/alternative beneficiary only gets triggered if the primary beneficiary is unascertainable, barred from receiving payment (such as committing a crime against the IRA owner), or dies before the IRA owner and the IRA owner does not update the firm. It is something that is rarely invoked and does NOT mean that they receive anything from the assets that the primary beneficiary receives.

A common question, then, is this: How do you provide for your new spouse while also making your sure that your kids are taken care after the death of your second spouse?

Well, a rudimentary approach that requires no special tax planning is to apportion your IRA in a way that takes your of your wife and kids simultaneously. If you have three kids, you might give each of them 20% of your IRA and then give 40% of your IRA to your second spouse. It is simple, quick, clear, and allows each of the parties to go on their separate ways.

Other times, the approach stated above may prove inadequate. It most likely involves guesswork that forces you to err on the side of giving your new spouse either more or less than is adequate to meet living expenses.

For people that have meaningful assets and want to be more specific, it can be wise to set up an irrevocable trust that is named as the exclusive beneficiary of the IRA. This way, you can provide written instructions for the irrevocable trust to, say, provide $60,000 per year for the second spouse for the rest of his/her life and then the kids from the prior marriage can split what remains thereafter.

The downside of this strategy is that it requires the typical costs of setting up a trust fund and may carry high income tax rates. It can capture the marital deduction that will delay estate taxes until the death of the second spouse, but such an arrangement cannot be used to create a multi-generational IRA that, say, would pay out earnings to the prior kids or subsequent grandchildren after the death of the second spouse.

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