IRAs and 401(k)s

Read the WARNING! first.

"IRAs" and "401(k)s" are short descriptions for certain types of retirement accounts/plans that provide potential tax-savings to the plan participant.  An IRA is an individual retirement account.  IRAs are stock, brokerage or bank accounts that are opened by an individual and recognized by the Internal Revenue Code. Another type of retirement plan is the 401(k), which is created by an employer for the benefit of employees.

People often forget about qualified retirement plans, such as IRAs and 401(k)s when they make a Will, create a Trust or otherwise plan their estates.  This is often because the retirement plans have a system in place to name a beneficiary for the retirement account.  Many people believe that the named beneficiary will always receive the proceeds of the plan upon the death of the participant. In Arizona, the failure to properly consider IRAs and 401(k)s can have unintended and disastrous consequences.

IRAs and 401(ks) are creatures of federal law.  And, there are substantial differences between the two (2) types of retirement plans, especially when it comes to the interplay of federal law with Wills, Trusts and Arizona community properly law.  The most significant difference, for Arizona estate planning purposes, is the requirement of federal law that upon death the 401(k) distribution must be made to the participant's spouse, regardless of what the Will says and no matter who the participant has listed as a beneficiary of the plan.  This federal mandate applies even if the participant was single when the plan was established, and then later marries.

Even if the participant fills out a designated beneficiary form to have the proceeds paid to his/her children upon death, federal law says that the proceeds must be paid to the surviving spouse.  In most situations (especially where there is a second marriage and step-children), this result can wreak havoc.  The only way to avoid the impact of the federal law is for the spouse to sign a waiver of the right to receive the distributions.  This waiver must be properly prepared, properly explained, properly documented, and properly retained.

Another unintended consequence arises from the impact of Arizona's community property laws.  A spouse's contributions to an IRA account if made from earnings are community property.  Thus, the surviving spouse has a claim to a portion of the funds in the IRA account, even though a beneficiary has been designated. Funds paid over to the designated beneficiary could prompt a lawsuit from the surviving spouse over the community property portion of the account.  The only sure-fire way to avoid this problem is to have the spouse sign a proper waiver, after it has been properly prepared, properly explained, properly documented, and properly retained.

For assistance with an Arizona IRA, 401(k) or other retirement plan issue, contact us.