Utilizing In-Marriage QDRO’s for Estate Planning

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.

Moreover, as all families are different, there are countless 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.  

Whatever the reason, what options does the family really have? Depending on the circumstances, generally, there are several options: (1) retire; (2) quit; (3) divorce; (4) take a plan loan; (5) qualify for a hardship distribution; (6) receive an in-service distribution; or (7) obtain an in-marriage Qualified Domestic Relations Order (QDRO). Because of the negative consequences of options 1 through 6, most people opt for option 7, if they can qualify for it.  

Many people may have heard the term “Qualified Domestic Relations Order”, 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 (nonemployee 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 401(k), 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 401(k), the funds in the IRA or SEP could be transferred to the solo 401(k) and then qualify for the in-marriage QDRO.

Once a decision is made to proceed with 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, there will need to be an inter-spousal agreement drafted that is the basis for the justification of the in-marriage QDRO. The inter-spousal agreement will 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 72, 73, or 75 depending on his/her birth year.   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. If this is something you are interested in, be sure to consult with a qualified attorney.

Jessica L. Estes is an elder law and estate planning attorney at ERA Law Group, LLC in Annapolis. She can be reached at (410) 919-1790 or via email at [email protected].