On June 26, 2015, the U.S. Supreme Court lifted the ban on same sex-marriages in the 13 states that still had them, passing a federal legislation to offer marriage licenses to same-sex couples. This validation of same-sex marriage in all 50 states may affect the beneficiary designations of your retirement plans. What does this new ruling mean for your retirement plan?
What the Law Was
Federal tax code provides the tax incentives found in retirement plans: tax deferment on earnings, potential tax deduction for contributions or tax-free distribution of earnings. Some of these benefits are passed on to the beneficiaries who inherit these accounts. Spouse beneficiaries can treat the account of a deceased spouse as their own, both spouses enjoy the benefit of the savings during their retirement years. Non-spouse beneficiaries cannot treat the account as their own. However, they do receive the tax benefit upon distribution that is associated with the type of IRA they inherit (i.e., Traditional or Roth).
The protection of asset entitlement is another issue that is determined at the state level. Some states, who have adopted community or marital property law, require the spouse of a retirement account owner to waive their rights if the retirement account owner chooses to name another person or persons as the beneficiary in their account.
When the Supreme Court overturned key provisions of the Defense of Marriage Act, the federal government deferred to the states to determine the legality of same-sex marriages. This meant state laws determined whether a same-sex partner was a spouse or a non-spouse for purposes of beneficiary’s options upon death and whether the same-sex partner has a legal claim to assets when the account holder names someone else as a beneficiary.
What Has Changed
Now that the Supreme Court has lifted the ban on same-sex marriages in all states, no state may impose its laws to determine whether a same-sex couple’s marriage is legal or not. This gives all spouses, heterosexual and same-sex marriages, the right to treat inherited IRAs as their own. When it comes to marital and community property states, depending on where you live, may still require spousal consent to name someone other than a spouse as a beneficiary, which now is applicable to same-sex married couples.
What You Need to Do
- Review your beneficiary designation forms. All spouses can now treat their spouse’s retirement plan as their own if named as a beneficiary. This will allow the beneficiary spouse to prolong the tax deferment of assets under the retirement plan.
- In community property states, retirement account holders may need spousal consent to name someone else besides spouse as their beneficiary.
- Consult with a competent estate planner or legal advisor to make sure that proper planning is in place to maximize federal and state estate tax benefits.
If you want to learn more, please consult Entrust’s Learning Center. For any specific questions, contact an experienced Entrust representative at 800-392-9653.