401(k) Inheritance Rules: You Might be Surprised

Gold diggers are shameful. At least in my view, anyway. The idea that someone (female or male) could marry and try to extract as much out of the other person as possible, is a different way of thinking than I possess. Did you know that even one’s retirement fund could be at risk, as 401(k) inheritance rules provide loopholes for some unintended and surprising consequences to occur?

The idea that 401(k) inheritance rules are not 100% clear to everyone is probably something that should be changed, with a little more visibility put on the subject.  Which is what I’d like to do here, after reading a recent article in the WSJ that shared a few eye opening stories on 401(k) plans and IRAs with respect to beneficiaries and legal rights.

Here are the rules:

  1. If you have a 401(k) and are married: If you die, your spouse is assumed to be the beneficiary. Now, you may have actually named someone else to be the beneficiary. However, unless your spouse consents to having another person be named, he or she will be the beneficiary, regardless of who you named.
    • Why it matters: somebody marrying later in life could actually want to give his/her hard-earned money to a grown child. However, even if the adult child is named a beneficiary, a new spouse could claim all the money while the kid gets shut out of the 401(k) funds of the parent. Gold diggers or those with an unfair sense of entitlement could trump the true wishes of the person who actually earned the money prior to the new marriage.
    • Solution: to make sure that the intended beneficiary gets the assets, it might be worth considering rolling over the 401(k) into an IRA when possible. IRAs are impacted by state laws, as opposed to 401(k) plans, which are governed under federal legislation.  Generally, in many states, you can name anybody to be the beneficiary of your IRA – and you don’t need your spouse’s consent. Thus, a person could name their own children without any subsequent issues, unless restrictions apply in certain states.
  2. If you have a 401(k) and are single: If you die, your 401(k) will pass to the person who has been designated as your beneficiary, regardless of what’s stated in your will or other arrangements you’ve made.
    • Why it matters: somebody originally assigning one person as the beneficiary on the form, yet subsequently naming a second person as the person who will inherit the funds based on a will, will find that his/her money will go to the first person. This means that what’s on the beneficiary form trumps what’s in a will or in other documents.
    • Solution: to ensure that the intended beneficiary actually inherits the assets, make sure to have the beneficiary actually noted as such on the account paperwork, with the prior beneficiary removed.

Now, I’m not going to pretend to be an expert on estate law, so please contact a professional for exact details before making decisions. I just wanted to bring the topic to light because I’m not sure how many people really know what these rules are. Of course, most people don’t want to be in a position to have to deal with such issues in life. However, life can take twists and turns, and it’s good to know that what might seem to be common sense and fairness doesn’t necessarily mean as much in terms of actual practice. It’s best to be informed!

In considering the examples given in the article I referenced above, it’s really incredible how some of these things work.  People only married for short periods of time can inherit tons of money, while adult children can be disinherited due to what amount to clerical issues trumping heartfelt intentions. Or, ex-spouses – years after a divorce – claiming retirement money and overriding other agreements by calling on clerical technicalities. Remarkable. I couldn’t imagine trying to circumvent the real wishes of somebody. I mean, in my view, adult children should have priority over a brand new spouse of somebody later in life, don’t you think?

My Questions for You:

Were you aware of how these rules worked?

Do you know of any cases where inheritances were disputed among family members?

Are you with me in supporting adult children as the top priority for assets earned prior to the new marriage?

 

Comments

    • Squirrelers says

      Moneycone – makes you wonder, right? :) I’m curious about the logic behind such laws, and how they could actually be the most effective solution for our current society.

    • Squirrelers says

      It IS bad, I agree. I don’t see how anybody with a conscience could take money from a spouses children from a prior marriage.

    • Squirrelers says

      Robert – actually, that’s not the case. In reality, it seems as if the beneficiary form is bypassed and the spouse gets priority regardless of what’s on the form. Unless they actually agree to not be the beneficiary, regardless of what’s on the form. So basically, beneficiary forms aren’t the end all be all, it appears.

  1. Holly says

    But this article states that even if you do sign a beneficiary for your 401K, your spouse has to agree w/that if she/he is not the stated beneficiary.

  2. says

    I suppose I am one of the few who actually knew this since about 3 weeks ago, we had a change in our retirement accounts with a brand new 401(k). We had to name the beneficiary and had a special form to have our spouse sign if he/she wasn’t named. For me, it didn’t matter since I would want my wife to have the funds.

    • Squirrelers says

      cashflowmantra –

      That’s interesting that you’ve seen this in practice. I suppose it’s probably something people do encounter in such situations, and might not even give a passing thought to it. After all, wouldn’t many or even most people want their spouse to receive the funds anyway? Of course, that’s assuming a great, 1st and only marriage. For those who for better or worse end up in a position to remarry much later in life, it’s probably not what they’d want to do.

      But, it looks like the default is set up for the former and not the latter. I guess in our society, it’s probably presumptous for such legislation to potentially assume that everyone would be in that position. Seems to me that someone’s wishes being respected would be good for all parties, regardless of younger/older, stable marriage or remarriage later in life. Or any other situation. Money goes to who you want it to go to, and who you designate it to be given to – that makes sense to me. Just my 2 cents, not that it impact me but it just seems inefficient how the current rule is.

  3. Squirrelers says

    Ashley – I would agree with you. If people marry when later in life, after having kids already, it just makes sense that they would have to hash out all of these financial considerations and be in agreement, right?. That would mean doing due dilligence on the rules, and not letting emotions get you carried away. Smart, though probably easier said that done I suppose.

  4. Anon says

    I am likely to be one of those affected. As soon as my father remarried, my mom started yelling at us (kids), “Well, there goes your inheritance!”

    Not that it matters, since we were already told to not expect anything…which I still think is pretty rude! It’s fine to have no intentions of leaving anything to your children, but does it really need to be verbalized? And what about their grandchildren? Guess they’re out of luck by default.

  5. says

    Wow, such a great article! No, I was not aware of this. Fortunately we have no one in the family who is likely to be in this position. But, yes, I believe the grown kids should be the primary beneficiaries. I think most people know it’s a good idea to get a pre-nup for a second marriage where children and money are involved. Unfortunately an older person could be persuaded by a gold digger to not have one. Yes, gold diggers are shameless.

  6. says

    The reason this rule exists is for equally unsavory reasons. Men were leaving their 401K’s to their gold-dgging mistresses and the spouses were clueless until their spouses died and were left near penniless. I think the same rule applies for any employer provided benefits like life insurances. You actually can designate another beneficiary but the spouse needs to sign off on it, so he or she are not left in the dark about what’s going on.

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