Another item of importance is that if some of your assets are in a qualified retirement plan such as a 401(k), you need to take extra steps – especially if you intend to leave those assets to someone other than your spouse. Accounts like a 401(k) (e.g., 403(b) or 457 plan) are under the jurisdiction of ERISA and IRAs are not. The ERISA regulations require that if you name someone other than your spouse as the beneficiary of the account, your spouse must waive his or her rights to the plan assets upon your death. By rolling over those assets to an IRA, you will have much more flexibility in designating beneficiaries of the assets.
It should be noted though, that when rolling over funds from an ERISA-controlled plan to an IRA with a non-spouse beneficiary, your spouse will still have to sign off, waiving rights to the account.
The Point
The point of all this is that, too often the decision of naming beneficiaries of your IRA or other qualified plan is perceived as an “automatic” choice – spouse as the primary, children as the secondary beneficiaries. In a blended family there are complications to the relationships that you need to address and account for in your plan. If you don’t pay careful attention to what this really means in terms of actual distribution of assets among your beneficiaries, the result can be something much different from what you hoped for. This can be especially troublesome in a blended family of the sort described previously. By making some changes with your IRAs or accounting for asset distribution with life insurance policies (for example), you can ensure that your assets are distributed in the fashion that you’d hoped for.
Note: I have purposely not included discussion of estate taxes in this article in order to maintain simplicity.
For more investment trends, visit the Advisor Solutions Channel