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Chapter Seventeen

Louisiana Community Property Law and Retirement Plans

             

                    

Louisiana is a community property state; therefore, each spouse has an undivided one-half interest in QRPs and IRAs if the retirement assets are acquired during the community regime (during the marriage unless a prenuptial agreement is in effect or the spouses elected out of the community property regime).  In the event of divorce, the non-participant spouse has a right to receive his or her community property interest in an IRA or QRP.  However in the event of death of the QRP owner or their spouse, the rules are not so clear cut.  If the participant dies first, the plan assets are distributed according to the beneficiary designation, not according to the will unless the estate is the beneficiary.  The problem arises when the non-participant spouse dies first and attempts to dispose of his or her community property interest in the participant spouseís plan by their will or through intestacy.

 

According to IRC ß408(g) community property laws are ignored when classifying IRAs.  The entire IRA is included in the IRA ownerís federal gross estate and zero is included in the spouseís federal gross estate.  In Louisiana, however, the spouseís may owe an accounting to each other for their respective community property interests.  If the surviving spouse is not the beneficiary of a community property IRA, the estate of the IRA participant may owe an accounting to the surviving spouse for their community property interest after the IRA owner dies (disregarding ERISA). Succession of McVay v. McVay, 476 So. 2d 1070 (La. App. 3d Cir. 1985).  If the surviving spouse is the IRA beneficiary, no accounting would be required.

 

Federal Preemption of Community Property Rights

 

According to the United States Supreme Court in Boggs vs. Boggs, 117 S. Ct. 1754 (1997), because QRPs are governed by ERISA, a federal law which preempts Louisiana community property law, a non-participant spouse cannot bequeath their community property interest in the participant spouseís QRP. 

 

Thus, if the non-participant spouse predeceases the participant, the non-participantís share of the QRP goes to the participant and not to the non-participantís heirs.   The non-participant spouseís community property interest disappears upon predeceasing the participant.  The law is unsettled at this time and hopefully this conflict between state and federal law will be reconciled.  In the meantime, the outcome can lead to potential problems. 

 

The Stacking Problem

 

Because Boggs requires the entire value of the QRP, which often is the largest asset in the estate, to be treated as the participantís separate property, the entire value is included in the participantís estate. This can cause "stacking" having too many assets in the participantís estate and too few assets in the non-participant spouseís estate.  Often, it would be beneficial from a tax saving perspective to allocate some of participant spouseís qualified plan to the estate of the deceased non-participant spouse.  The Boggs decision prohibits allocating half of the participantís QRP to the estate of the deceased non-participant spouse.  Too few assets in the non-participating spouseís estate may result in wasting that spouseís lifetime estate tax exemption.  The end result is higher estate tax liability due to wasting some of the federal estate tax exemption.

           

Community Property and IRAs

 

Because ERISA does not govern IRAs, the majority consensus is that Boggs does not apply to IRAs.  Until this issue is further resolved, there will be some uncertainty.

 

            If the surviving spouse is named as the sole beneficiary of the IRA, he or she receives both halves of the community property interests in the IRA.  If the surviving spouse does not at least receive his or her half of a community property IRA, the surviving spouse should have a claim for their one-half community property interest after the participant's death.

 

            It is important to distinguish when the IRA is funded to determine whether community property laws will apply.  If benefits are rolled into an IRA from a qualified plan after the death of the non-participant spouse, then the IRA should be treated as separate property.  The non-participant spouse's interest terminated at his or her death.  However, if the benefits are rolled into an IRA from a qualified plan prior to the death of the non-participant spouse, then community property law should apply to the IRA.

 

            To avoid the complexity and uncertainty in light of Boggs, participants should consider naming their spouse as beneficiary of qualified plans and IRAs.  In addition, the non-participant spouse should consider naming the participant spouse as beneficiary of his or her community property share.  Non-retirement assets can be used to satisfy the bequest to non-spouses.

 

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Disclaimer

 

This book is not intended to be legal advice.  Neither John E. Sirois, Raymond James Financial Services, Inc. nor John E. Sirois, A Professional Law corporation are responsible for the consequences of a particular transaction based on the contents of this book.  All financial, retirement and estate plans should be individualized as each person's situation is unique.  Competent financial, tax and legal advisors should be consulted prior to any transaction.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the forgoing material is accurate or complete.  Any opinions are those of John Sirois and not necessarily those of Raymond James.  Expression of opinion are as of this date and are subject to change without notice.

 

 
   

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Copyright © 2005 John E. Sirois