By Jessica L. Estes
As an estate planning and elder law attorney, often the most difficult type of asset to deal with is a retirement account. Not only must you consider the type of account it is, but you must understand the owner’s rights to the funds in the account, as well as the consequences, tax or otherwise, of accessing those funds, which can depend on age and/or other factors. In Maryland, retirement accounts are countable assets for Medicaid purposes, which adds another layer of complication. And, even something as simple as naming a beneficiary for the retirement account is not as simple as it may seem, especially if asset protection is your main goal.
There are many reasons why someone may need to access retirement benefits. Perhaps one’s spouse is in a nursing home and has a substantial retirement account that will have to be “spent-down” before qualifying for Medicaid, but the family wants to preserve those monies for the spouse at home, without suffering a huge tax consequence. Or, perhaps one spouse is older than the other spouse and wants to delay taking required minimum distributions (“RMD’s”), as the couple does not need the extra income and wants to avoid additional taxes.
Many people may have heard the term Qualified Domestic Relations Order (“QDRO”), but only in context to a divorce, and very few understand what a QDRO really is. Simply put, a QDRO is an order signed by an appropriate state court judge that: (1) recognizes the joint marital ownership interest in a retirement plan; (2) provides for the plan benefits between the parties – the plan participant (employee spouse) and the alternate payee (non-employee spouse); and (3) is approved, or qualified, by the retirement plan administrator. Unlike a QDRO in a divorce that transfers retirement benefits to an ex-spouse, an “in-marriage QDRO” transfers retirement benefits to a current spouse.
To be eligible for an in-marriage QDRO, the retirement account must be an Employee Retirement Income Security Act (“ERISA”) based plan, certain state pension plans, or a Federal Thrift Savings Plan. ERISA-based plans include 401k, 401(a), 403(b), corporate pension plans, some employee stock ownership plans, profit sharing plans, and State deferred compensation 457 plans. Plans that are not eligible for an in-marriage QDRO include military pensions, Federal pensions (FERS and CSRS), railroad retirement plans and privately sponsored non-qualified stock plans. Although individual retirement accounts (IRA’s) and simplified employee pension plans (SEP’s) are not immediately eligible, if a limited liability company (“LLC”) was established with a solo 401k, the funds in the IRA or SEP could be transferred to the solo 401k and then qualify for the in-marriage QDRO.
If eligible for an in-marriage QDRO, a review of the plan documents is necessary to verify the amount that may be transferred, as well as the amount that should be transferred based on the family’s needs. Similarly, an inter-spousal agreement must be drafted that is the basis for the justification of the in-marriage QDRO. The inter-spousal agreement should lay out the agreement between the spouses as to the division of the retirement funds. Using the example of the couple wanting to delay RMD’s, the agreement may state that all the retirement account will be transferred to the younger spouse which would allow the funds to remain in the account until the younger spouse reaches age 70 ½. Or, in the case of the couple wanting to qualify for Medicaid benefits, rather than “spend-down” the funds and pay taxes on that money, the retirement funds of the nursing home spouse would be transferred to the spouse still residing at home, which could avoid most, if not all, of the tax consequences and preserve the asset for the community spouse, while allowing the nursing home spouse to qualify for Medicaid benefits.
As you can see, in-marriage QDRO’s can be useful tools for estate planning but require careful drafting and knowledge of the various federal and state laws. Do not attempt this on your own; contact a qualified attorney to assist and help you navigate these complicated rules.