The New Year is only a few days away. If you haven’t already done so, it’s time to make sure to make the most use of your 401k by making the proper elections. When you do so, make sure to check your beneficiaries too.
You may not believe it, but the courts can and do set aside your 401k beneficiary elections under certain circumstances. That’s right. 401k beneficiary rules are vastly different from IRA beneficiary rules. I have to admit that this came as a shock to me but it is actually true. Let me share with you a story I read in Investment News Magazine.
Neal’s Notes – While we’re talking about safeguarding your 401k, you might want to learn about making your retirement accounts credit proof. Just saying….
A married gentleman named his wife beneficiary of his 401k. When she died, he named his 3 children beneficiaries instead. So far so good. But a few years later, this man remarried. He wanted to keep his children as beneficiaries of his 401k but he didn’t get his new wife to sign a waiver. He figured, as would I, that since he named the kids beneficiaries before he remarried, he wouldn’t have to sign any new forms. Wrong.
He died shortly after he remarried. The new wife sued the kids and guess what? She won. That’s right. The courts found that spousal rights to retirement accounts trumps the beneficiary form. I had to read that twice because it was news to me. But it’s important information if you own a 401k.
In most cases, the beneficiary form is more important than wills, trusts, contracts, prenuptial agreements etc. It is probably one of the most important estate planning documents at your disposal. But when it comes to 401k beneficiary forms, spousal rights come first.
What does this mean to you?
First, if you are married and you want anyone other than your spouse to be the 401k beneficiary, make sure your spouse signs a waiver. Keep a copy and make sure your non-spouse beneficiary gets a copy as well.
Next, if you are single now and you’ve named your children or others as beneficiaries, don’t fall asleep. If you remarry, make sure you ask your new spouse to sign a waiver if you want these other people to remain the beneficiaries. You might even want to make it a condition in the prenuptial agreement. If you don’t get your new spouse to sign this waiver, your 401k beneficiary form might become useless if this recent case is a precedent.
The story also demonstrates the danger of keeping your 401k with your old employer. Had this gentleman done a tax free IRA rollover before he remarried, his children would not have encountered this problem. So the final take-away is that there are different rules for IRA’s and 401k’s.
Does it make sense that there are such differences between these two retirement plans? Not to me it doesn’t. But that doesn’t matter. If you have a 401k, keep this rule in mind if you are interested in protecting your non-spouse 401k beneficiary.
Were you aware of this rule? What are you going to do to protect yourself?