Second Marriages and Home Ownership

Reader Question:  My husband and I have separate Wills with designated beneficiaries since this is our second marriage. With regard to our home, which we own, if I should die first he would remain living there until he died, then the property would go to our respective beneficiaries to divide. Obviously this would prevent my investment in our home to go to his heirs if I should die first and his investment to go to my heirs should he die first. My question is this: If he should die first and due to health reasons I would eventually need to move into a retirement/assisted living home, could I sell the home in order to cover the expenses required for this move?  G.H.

Answer:  A lot of couples from second marriages struggle with how to divide joint assets at death in a way that treats the children fairly.  Dealing with a home can be particularly tricky since the survivor of the couple most often wants to have the option of remaining in the home.  It sounds like you’ve constructed a special deed that is joint tenants-in-common with a lifetime interest for the survivor.  This means that you each own one-half of the home in your own name but, by deed, you allow the surviving spouse to remain in the home for his or her lifetime.  Under an arrangement like this, should the survivor need (or choose) to move to a retirement community or nursing facility, the home would be sold and the deceased spouse’s heirs would receive their one-half of the home equity.  The surviving spouse would receive one-half of the equity to use as he or she chooses.

Reader Question:  I am 66, retired, and living off $1600 per month Social Security. I have an annuity and two 401ks. I have recently heard of doing a Roth conversion to avoid income taxes. Would this be beneficial since I will have to take Required Minimum Distributions (RMDs) beginning at age 70½, thereby increasing my taxable income? Will I have to take RMDs on 401ks and the annuity?  J.H.

Answer:  First, I’m going to assume that your annuity is a qualified annuity, meaning you purchased it with pre-tax dollars.  When you convert a qualified annuity or 401k to a Roth IRA, the portion converted is treated as ordinary income for income tax purposes.  For example, let’s assume you converted a $10,000 qualified annuity to a Roth IRA.  In the year of conversion, you must report $10,000 as ordinary income on your tax return.  Once converted to a Roth IRA, that money will never be subject to income taxes and is not subject to the RMD rules during your lifetime.  Your beneficiary, at your death (presumably children), must begin taking distributions over their life expectancy but those distributions are not subject to income taxes.  Deciding on whether converting your 401ks and annuity is a good idea, you should consider two things:

  1. Can you convert in a relatively low income tax bracket?  If your primary source of income is Social Security, you’re likely in a relatively low tax bracket and converting may not trigger a lot of extra taxes.  Or you might consider converting over several tax years to lessen the taxes.
  2. Are you able to pay the income taxes from sources other than the converted funds?  Your goal should be to preserve 100% of the converted funds in your Roth IRA so you’ll need another place to pull money from (savings?) to pay the taxes.

The answer to the final part of your question is, yes, you’ll need to calculate your RMD for each of your 401k accounts and your annuity and take the appropriate distribution from each account.  For multiple IRA accounts, you can aggregate the accounts to determine the RMD and then take the RMD from any one (or more than one) IRA accounts.