An Arizona couple received an inheritance and sought financial advice on how to invest it while protecting their assets in the event of a divorce. They wanted to maximize their retirement savings but also safeguard their individual interests.
The couple expressed a desire to invest the funds to improve their retirement planning. However, they acknowledged the possibility of divorce, despite having no current plans for separation. Their primary concern was ensuring that each spouse would retain their rightful share of the inheritance.
Arizona is a community property state. This means that assets acquired during the marriage are jointly owned. However, inheritance received during the marriage remains separate property. Experts emphasized the importance of keeping the inheritance separate from the couple’s existing joint finances.
One suggestion was to invest the inheritance in a separate brokerage account under the inheriting spouse’s name only. This would ensure that the funds remain solely hers, irrespective of any future marital changes. Investment options such as diversified mutual funds or exchange-traded funds were also mentioned.
The advice also addressed the couple’s existing retirement accounts. While employer-sponsored 401(k)s have separate and community property components, IRAs are considered community property in Arizona. Contributing the inheritance to these accounts could complicate matters in the event of a divorce.
Merrill Edge, an investment advisory service, clarified the process of dividing retirement assets during a divorce. Distributions made pursuant to a Qualified Domestic Relations Order (QDRO) avoid early withdrawal penalties, though taxes still apply.
Further guidance came from legal experts. Even if an IRA is held solely in one spouse’s name, the other spouse could claim a 50% interest in the community property portion of the account. This could even be the case if the other spouse made all contributions during the marriage. A custodian-to-custodian transfer can typically move the community property interest to the other spouse’s IRA without tax penalties.
The couple was advised to carefully consider these legal and financial factors when deciding how to invest their inheritance, given the complexities of Arizona‘s community property laws. The importance of diversification and careful planning was reiterated to protect their assets in various scenarios.
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