Dear Mr. Premack: My husband and I have been married for many
years but we each have two grown children from our first marriages.
All of the assets we have now were accumulated during this second
marriage and we consider them to be community property. We each have
our wills set up to put our estates in trust for each other and then
at the spouse's death to go to our respective children. My question is
about my IRA. I know that it passes to its beneficiary, but does all
of the IRA go to my husband (who is beneficiary) or does half of the
IRA go into the trust (and then eventually pass to my children)? Thank
you very much for your help! – FH
Money placed into an IRA
during the course of a marriage is community property under Texas law.
There are certain other types of pensions (like defined benefit
pensions) that are subject to the federal ERISA law (Employee
Retirement Income Security Act). ERISA generally supersedes state law,
and requires certain benefits to be provided to a surviving spouse.
The federal courts have ruled that an IRA, though a form of pension,
is not subject to ERISA and that state community property law applies
to an IRA. Thus, it is possible to create a conflict between the
beneficiary designation on the IRA and the surviving spouse’s
community property rights under state law.
Here is an
example: a married wife contributes $100,000 to her IRA over many
years. The contributions are made from earnings, and are thus
community property. While most people designate their surviving spouse
as direct beneficiary (the tax benefits are broadest this way) this
wife designates their son as sole beneficiary. Son is, under the terms
of the IRA, entitled to the entire $100,000 amount when mother dies.
Set up in that fashion, the IRA terms conflict with the
surviving husband’s community property rights. Under Texas law the IRA
is community property since all the money in the IRA was earned during
the marriage. Half of the IRA balance is the husband’s property.
Designating the son to get all of the IRA, without husband’s consent,
is considered to be “fraud on the community estate”. Husband has the
legal right to recover his half of the IRA balance when wife dies. She
cannot legally give all of the IRA balance to a non-spouse without
obtaining the spouse’s consent to do so.
As IRA owner, what
can the wife legally do? 1) She can designate all the IRA balance to
the surviving husband, which is very typical. 2) She can give all of
the balance to another person so long as she obtains written consent
from her husband to do so. 3) She can designate half the IRA balance –
that is, her community half -- to another person without her husband’s
permission, so long as her husband still gets his half share.
In your letter, you say you each set up a trust in your Wills. You ask
if the IRA a) goes entirely to your husband as beneficiary, or b) if
half goes to your trust and half goes to your husband? You have three
1) You could keep your current designation
which gives all the IRA to your husband and leaves none to your trust.
That choice is legal but is not mandatory, and effectively takes
benefits away from your children. 2) You could obtain your husband’s
written consent for the entire balance to pass into your trust. That
choice effectively takes benefits away from his children. 3) You could
change the beneficiary designation to leave half of the IRA outright
to your husband and half to your trust. That way, his community
property rights are honored and each set of children eventually have
an equal benefit via the separate trusts in each of your Wills.
You should also have your lawyer review the Wills to be sure they
contain the clauses required by the IRS when a trust is designated as
a beneficiary. And review your durable power of attorney and medical
directives to make sure that they are up-to-date and appoint the
proper individuals to care for you if you become disabled.