Are you a resident of Washington State? Are you married? Do you have an Individual Retirement Account ("IRA") or other accounts with non-taxed income (qualified accounts)? If your answer is "yes" to any of these questions, then you and your spouse need to learn about community property and how being a resident of a community property state affects your retirement accounts. For the purposes of this article, "IRA" is used collectively to refer to retirement accounts, such as traditional IRAs, Roth IRAs, 401Ks, etc.
There is a close relationship between your estate plan and your retirement accounts. While your Will or Living Trust may state who will receive your assets when you pass away, it does not normally control your IRA and other qualified retirement accounts. Instead, the beneficiary or beneficiaries designated on your IRA determines who receives your IRA at your death. For this reason, it is a good idea to make sure that the beneficiary designations on your IRA accounts complement, and are coordinated with, your estate plan.
Although married couples tend to name each other as primary beneficiaries, there are often estate planning concerns that may require other primary beneficiaries instead, such as designating your Living Trust, your estate, or your children as the primary beneficiary of your IRA, rather than your spouse. If you decide to name someone other than your spouse as the primary beneficiary of your retirement account, and you live in Washington State, then you need to be aware of Washington's community property laws as it relates to retirement accounts.
In Washington, almost everything earned during the marriage is considered community property -- including your retirement accounts. For example, if you opened an IRA account during your marriage and you contributed to it using money earned during your marriage, your spouse has a 50% community property interest in that IRA, even though the IRA is solely in your name and only you can name a beneficiary on that IRA. This creates difficulties in planning for retirement assets. If your spouse is not the primary beneficiary, your spouse must waive his or her community property interest in your IRA. Many beneficiary designation forms require the spouse to sign a community property interest waiver, but the forms do not clearly explain the possible consequences of that waiver.
Waiving the community property interest in a retirement account can result in potential unintended consequences. One common example is when there is a blended family and the estate plan contains beneficiary protections to prevent each spouse's children from being disinherited by the other spouse. An unplanned community property interest waiver of an interest in an IRA can result in the loss of the beneficiary protection that the estate plan was intended to provide.
If you plan on updating your beneficiary designations, please also take the time to review your estate planning documents and talk with an investment advisor. If you want to schedule a check-up appointment with an attorney, please call Rehberg Law Group at 206.246.8772.
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