An Arizona couple is planning to invest an inheritance received from a deceased relative. They aim to boost their retirement savings but are also concerned about protecting their assets should their marriage end. They sought advice on how to invest this money to ensure individual ownership, even in the event of a divorce.
Arizona is a community property state. This means that assets acquired during the marriage are jointly owned. However, inheritances received during the marriage are considered separate property. This distinction is crucial for investment planning.
To protect the inheritance, the couple should consider investing it in a separate brokerage account solely under the wife’s name. This approach ensures that the funds remain independent of any community property. They could also diversify the investment, potentially using mutual funds or exchange-traded funds that track market indexes like the S&P 500 or the Vanguard Total Stock Market ETF (VTI).
The couple’s existing retirement accounts present a different challenge. In Arizona, IRAs are generally considered community property, while employer-sponsored 401(k) plans are treated differently. Contributions made before the marriage are separate property, but any growth or contributions made during the marriage become community property.
Dividing 401(k) accounts in a divorce often involves a Qualified Domestic Relations Order (QDRO). This legal order dictates how the assets will be split between the divorcing spouses. IRAs, however, can be divided through a distribution or rollover into a separate retirement account. While typically early withdrawals incur taxes, QDRO distributions are exempt from this penalty, though income taxes still apply.
Merrill Edge, an investment advisory service, notes that 401(k) plans often have provisions for surviving spouses. However, if a different beneficiary is desired, spousal consent is necessary, typically via a notarized waiver. Changes to beneficiary designations following marriage should be communicated to the employer or plan administrator.
Greenleaf Trust‘s senior legal trust adviser emphasized that even if an IRA is held solely in one spouse’s name, the other spouse could claim a 50% interest in the funds if it was accumulated during the marriage. This interest can often be transferred to the former spouse’s IRA without tax consequences. The experts’ advice highlights the importance of meticulous planning to protect assets under Arizona‘s community property laws.
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