Planning with Your Second Spouse in Mind
If you or your spouse has children from a previous marriage, take extra care to make sure everyone is considered if you die first. Communication is probably one of the more important things you can do, because whatever you decide best meets your wishes and your spouse’s and kids’ needs, it’s important that everyone knows why you decided to do what you did.
These things are especially important when you’re planning to leave retirement account assets behind in a way that assures you’ll provide for your spouse and your kids.
• If your kids are young, make sure you have enough life insurance that names them or a trust for their benefit as beneficiaries. If you’re in moderately good health, term life insurance is cheap. With enough coverage, you can decide to take advantage of the estate and income tax advantages of leaving your retirement accounts to your spouse without ignoring the financial needs of your kids.
• If your spouse is younger than you, don’t assume that your kids will ever see the money from your retirement accounts on which they’re listed as contingent beneficiaries. Your younger spouse may need most or all of your retirement assets for her own support. If you have a specific amount you want to give your kids, keep that amount in a separate account that names them specifically as primary beneficiaries.
• Don’t sell your spouse short to please your kids. Don’t automatically leave all your money to your kids without considering the financial needs of your second spouse. Remember that your spouse could incur medical costs or other expenses. Don’t set her up for a financially insecure retirement if hardship strikes after you’re gone.
• Keep in mind that your spouse can inherit some retirement assets more cheaply than your kids. Your kids may be able to continue the tax benefits of an IRA or a Roth account, but in many cases only a spouse can roll over a work plan like a 401(k) or a 403(b) to her benefit without tax. The same applies to pension benefits.
The Least You Need to Know
• The plan document will say whether a beneficiary can stretch retirement plan withdrawals out over her lifetime or whether she must empty the account within five years.
• Specifically list plan beneficiaries in the beneficiary designation paperwork.
• The plan trustees will confirm beneficiary changes that you make in writing.
• Many IRAs and some work plans will let you assign complex beneficiary designations if you ask them.
• Life insurance is a good way to be sure your young kids are financially secure if you want to leave your retirement accounts to your second spouse.
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