Bay Area Estate And Tax Planning Law Firm

IRA designated beneficiaries in community property states

On Behalf of | Mar 27, 2023 | Blog, Estate Planning |

Individual retirement accounts allow people to put money aside for their golden years and reduce their tax bills. When an IRA account holder dies before reaching retirement in most states, the money in the account will pass to the beneficiary they have designated even if that person is not their surviving spouse. This is because the money in an IRA is not considered part of a deceased person’s estate unless no beneficiary is designated or the designated beneficiary has passed away. However, things are a little different in states like California that have community property laws.

Community property states

In states like California, all of the money that a spouse earns while married is considered community property. This means that any money a spouse in a community property state deposits in an IRA account is equally owned by their husband or wife. As the money is jointly owned, a spouse must be the IRAs designated beneficiary. If a spouse in a community property state wants to designate a different beneficiary, they must first obtain approval from their husband or wife.

Unauthorized beneficiaries

When a spouse in California with an IRA designates a beneficiary who is not their spouse and does not obtain this approval, only half of the money in the account will pass to their designated beneficiary if they pass away before retiring. This is because only half of the money in the account was actually theirs. The other half of the money belongs to their surviving spouse under the state’s community property law. When a spouse is not an IRAs designated beneficiary, checking with the plan custodian to make sure proper authorization was obtained is an important estate planning task in states like California.

Designated beneficiaries

IRAs are useful retirement tools, but the money they contain is not considered part of an individual’s estate. This means that IRA funds are distributed to an IRA’s designated beneficiary if the account holder dies before retiring. In a community property state like California, that designated beneficiary can only be a person other than the account holder’s spouse if the account holder’s spouse consents.