Who Gets Your Retirement Accounts?

You might be surprised!  Let’s look at the following examples.

  • Husband names wife as his beneficiary on his 401(k). Husband and wife divorce and the wife gives up any claim she has to the husband’s 401(k) in the divorce settlement.  Husband never gets around to updating his beneficiary designation on the 401(k).  Husband dies.  Who takes?  [The ex-wife!]
  • Husband and wife divorce and husband then changes his beneficiary designation on his 401(k) to his adult children.  Husband marries wife 2, then dies a few years later.  Who takes?  [New wife 2!]

Why?  Federal law governs 401(k) plans, so under Employee Retirement Income Security Act, or Erisa, if you are married, your spouse is presumed to be your beneficiary, regardless of whom you have listed on your beneficiary designation form.  That means that if you are married, unless your spouse signs a waiver, or has consented to someone else being named as your beneficiary, they are presumed to be the beneficiary.

Under Erisa, if you are single, your beneficiary of your 401(k) on your death is presumed to be the person or persons named on your beneficiary designation form.  So if you have named a prior spouse (now ex-spouse) as a beneficiary on your 401(k), and don’t get around to updating your beneficiary designations, they may receive a nice windfall upon your death, even if they waived the right to the money in a divorce.

How do you get around those problems with 401(k)s?  Well, the most obvious thing would be to make sure that you properly update your beneficiary designations if you are single.  If you are married and do not wish to leave your 401(k) to your spouse, see if they will sign a waiver or execute the consent to name someone else as a beneficiary.

Alternatively, you might consider cashing out or rolling over your 401(k) into an IRA when you change jobs or retire.  State law controls IRAs; not federal law.  If you are married and live in a community property state, you may not be able to gift your spouse’s community property interest in the IRA to your named beneficiary without their consent, but you may gift your share of the community estate.  Also, with an IRA, if you later divorce, the law usually treats ex-spouses as if they have predeceased you, so your IRA will usually pass to your alternate beneficiaries or to your estate by default if no other beneficiaries are named.

That is why it is always important to review your beneficiary designations on your accounts at the same time as you periodically review your Will to see if everything is up to date.

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