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?
Antonio says
I am divorsed 28 years and never remarried. I was let go of my job before retirement age and have since rolled over my 401k to a new company. My ex received her portion of that when this occured. Now. I may get married again and i have my 2 children as benificiaries on the new account. If i die prematurly and i am remarried. I was told that my wife can contest it in court and take the money that i intended for my 2 children. What can i do to ensure my kids get at least the portion of what i want to give them or all if i die i amalso only 53 years old and cannot touch my 401k without a penalty. Thank you.
Neal Frankle, CFP ® says
This would be a good question for an attorney just to be sure. However, make sure to check your beneficiary forms to insure they are completed correctly.
Neal
Rhonda says
My husband’s wishes were to leave his 401k to his sons so he added them as beneficiaries at 50% each. He was not made aware that a spousal consent was needed nor did I realize that I would need to sign such a consent. My husband has since passed away and I intend to honor his wishes. May I sign a spousal consent after the fact? Thank you in advance.
Neal Frankle, CFP ® says
You should speak w/an attorney and/or CPA but I doubt it. One option is to give them the money which means you would have to pay the tax on all of it at once. Not the best. Another option is to keep it in your name and act as if it’s their money and just do what they ask.
I am sorry for your loss. This is a bad situation. You should also talk to an attorney about possibly suing the custodian. They should have NEVER accepted that beneficiary document with your signature.
I wish I had better ideas. Maybe your attorney/CPA can think of something better. Please consult with them.
Neal
April says
My father no doubt had my brother and I as beneficiaries. He had cancer, retired in October 2015. He had cancer in his brain at that time and many meds. She redid the paper work “I believe”. He was not aware enough to know what he was signing. I have not heard anything from his 401k/retirement. Is it legal to do what she did? How do I find out if my brother and I were taken off?
Neal Frankle, CFP ® says
This is sadly a question only an attorney can help you with. I wish I could help more.
thel says
I don’t think spousal rights to retirement accounts nor trusts trumps the IRA beneficiary forms, otherwise my lawyer would have advised me to go after the other half of my deceased husband’s IRA which went to my brother-in-law.
Neal Frankle, CFP ® says
I think it depends. Spousal rights CAN trump the beneficiary form if the spouse didn’t sign off on naming another beneficiary. Did you sign off on allowing your husband to name his brother for 50%?
bob says
I f you are getting divorced most states require a division of 401k assets. Plan ahead.