The Rules for 401(k)s When You Die

401k piggy bankFederal law is pretty clear cut regarding what happens to company retirement plan assets if a married participant dies on the job. In that scenario, the survivor gets 100% of the account—provided that person hasn’t specifically waived the right.
When a worker takes a retirement plan payout as an annuity, he or she must select a plan that will continue lifetime payments to the surviving spouse equal to at least 50% of the original benefit amount. A spouse can also waive that right, but it must be in writing.
Kiplinger’s August 2016 article, “What Happens to Your 401(k) When You Die–Like It or Not,” reports that when President Reagan signed that rule into law back in 1984, he proudly said, “no longer will one member of a married couple be able to sign away survivor benefits for the other.”
The protection for a surviving spouse is so powerful that it’s superior to properly named beneficiaries. Further, this rule can’t be unset by a pre- or post-nuptial agreement where a spouse waives the death benefit. A pre-nup doesn’t do it since a spouse and not an engaged individual must waive the benefit, and a post-nup has no authority—unless the spouse actually signs a written waiver. Note that singles can designate whomever they choose as beneficiary.
While there are clear rules for the protection for a survivor’s rights, it’s a bit cloudier while the 401(k) owner is alive. There’s actually a loophole to the tune of $1 million in a lump-sum distribution. When a married worker leaves a job, most 401(k) plans permit the employee to roll over the balance to an IRA without notifying the spouse.
Once the money is in the IRA, the death benefit protection is gone.
In most states, the IRA owner can name anyone as beneficiary of the account. However, in community property states, you may need spousal consent to name someone other than your spouse as beneficiary of more than 50% of the account.
There are, however, some plans that require spousal consent for a distribution, such as when the default benefit under the plan is a joint annuity with the participant’s spouse. Otherwise, to claim benefits, such as a lump-sum distribution to be rolled into an IRA, the spouse must agree—it’s pretty rare among 401(k) plans. Plans that require a 100% death benefit for a spouse typically don’t demand spousal consent for a lump-sum payout.
It’s very important to understand the rules—and not just those of your own retirement plan but also of those that govern the plan that covers your spouse.
Reference: Kiplinger’s (August 2016) “What Happens to Your 401(k) When You Die – Like It or Not”


Getting Married Again Means “You Do” Need to Review Your Assets and Estate Plan

Wedding older coupleA major challenge for those walking down the aisle again is how to reconcile preserving assets for children from a prior marriage and still taking care of the commitment to a new spouse.
CNBC’s article, “Getting remarried? Protect your assets and your interests,” recommends looking ahead and addressing questions about your goals, how your existing family and new spouse will relate to one another when you're gone and who will be in charge of the money. The big issue that heirs of a remarrying couple need to worry about more than federal estate tax is the new spouse.
The reason for this is that every state except Georgia gives rights to a spouse to make an elective share against a decedent spouse's estate or have the right to community property. That means that a portion of an estate could go to the new spouse even if the decedent's will disinherits him or her. Unless you expressly exclude your new spouse from your will, he or she typically has an intestate right against the probate estate.
If an individual has an ERISA retirement account, the spouse likely has certain rights to it—whether it is a defined benefit or a defined contribution plan. IRAs aren’t subject to the same rules. In many states, the surviving spouse has rights to certain personal property. Sometimes this is based on values, and other times it’s set out in a state statute.
If there is no estate planning document, such as a will, power of attorney or health care directive, the new spouse is often statutorily designated as the first decision-maker with the legal authority to deny access to anyone who might want to have a say in the affairs or care of the incapacitated spouse.
The ex-spouse may still be involved because assets could still be left to your ex if you fail to update your beneficiary designations—even if you intended to leave things to your new spouse and/or children instead. You might be contractually obligated to keep your ex-spouse as beneficiary of a retirement account or life insurance policy for a certain period of time. Check the fine print.
When you’re updating your estate planning documents, also think about the following issues. First, consider whether you’d like to name your new spouse as your trustee/executor/agent because the disposition of assets becomes tricky when there are kids from prior marriages. Next, take a look at your assets and decide if you want to hold them individually or jointly. Jointly-held assets with rights of survivorship means that your surviving spouse will inherit these assets automatically without probate. Note that in a community property state, property that is obtained prior to marriage or in an inheritance can retain its character as separate property.
If your new spouse moves into your house, you’ll have to decide if you want to add his or her name to the deed and to the mortgage. You should consider where your spouse will live if you die first. Also, you may need to specifically bequeath certain personal items to your children—depending on family significance and your wishes—and be aware of how “children” is defined by your will. This could include only your own children or also your spouse's children. Here are a few other common estate planning mistakes people make after remarrying:
· Beneficiary designations left out-of-date;
· Assets unintentionally comingled;
· Failure to work with estate planning attorney on new estate planning documents;
· No prenuptial;
· Instructions to loved ones are verbal, not in writing;
· Failure to properly title the house; and
· Not buying long-term care insurance or planning for possible nursing home care.
Have a qualified estate planning attorney walk you through these details in a step-by-step manner to help avoid pitfalls. Don’t make one or more of these errors. These kinds of little mistakes can have big consequences.
Reference: CNBC (July 28, 2016) “Getting remarried? Protect your assets and your interests”


Don’t Leave a Bundle to Your Ex

Old couple in classic carDo you want your ex-spouse to inherit any part of your estate? It could happen if you initially signed up for a retirement plan or life insurance policy when you were married to your ex-spouse. Chances are good that you designated your spouse at the time as the beneficiary. Now that you are divorced (and possibly remarried), you need to revisit your beneficiary designations and overall estate planning.
ABC 15 Arizona’s recent post, “Beneficiary designation: Don't set it and forget it or your ex could end up with your life savings,” explains that under the Employee Retirement Income Security Act (ERISA), plan administrators must legally disburse the money to the person on the form—even if it’s an ex-spouse. This even overrides provisions to the contrary in your will. This mistake can create a real probate nightmare for loved ones—a mistake that’s really hard to correct after the fact.
Review all of your assets and to whom you intend to give them at your death whenever there’s a major life event like a birth, adoption, death, marriage or divorce. This quick check-up may save those you leave behind a lot of hard feelings, trouble and expense.
While you’re at it, here are several other things to consider:
1. Rather than listing a young adult as a beneficiary, ask an estate planning attorney about drafting a trust to detail exactly how you want the money to be disbursed.
2. Do not designate a minor as a beneficiary because life insurance policies won't pay minors directly. Consider a “testamentary trust” under your will or a similar inheritance trust under your living trust.
3. Remember you need to list a contingent beneficiary: if the primary beneficiary dies before you, you need a backup.
4. Want to list someone other than your spouse as the beneficiary on a 401(k) plan? Unless your spouse agrees, by law, you are not allowed to do this.
5. Failing to do estate planning creates ambiguity and means more headaches and fees for your family.
A qualified estate planning attorney can help you navigate all of the ins and outs of estate planning, giving you peace of mind and letting those you leave behind know that you cared enough to tackle these matters.
Reference: ABC 15 Arizona (July 17, 2016) “Beneficiary designation: Don't set it and forget it or your ex could end up with your life savings”


The Importance of Keeping Beneficiary Designations Up-To-Date

HowToHandleBeneficiaryDesignationLife insurance policies and retirement plans are key components of most estate plans today. In many cases, they represent the majority of assets in an estate. If the beneficiary designations are not kept up-to-date or not made at all, then these key assets may go to someone unintended.

Austin Hardy's employer managed his retirement plan, as is the case for millions of Americans. Hardy either neglected to or forgot to designate a death beneficiary for the plan.

As a result, when he passed away his employer followed the default rules of the plan. Those rules stated that if no surviving spouse or partner existed, then the plan should pass to a surviving child, whether biological or adopted.

Thus, the company transferred the plan contents to Hardy's biological daughter upon his passing.

The problem was that she was not Hardy's legal daughter. She had been adopted by her stepfather. For all legal purposes, she was not Hardy's daughter and he had no legal responsibility for her.

His sisters sued, claiming that the plan assets should have gone to them, not the daughter. The court, however, disagreed with the sisters' position.

In the court's view, the daughter, despite the stepfather's adoption of her, was still Hardy's daughter and thus the plan policy was appropriately followed.

The Wills, Trusts & Estates Prof Blog reported on this case in a recent article titled "Girl Adopted By Stepfather Entitled to Biological Father's Retirement Plan."

This case is obviously a bit unusual. The fact pattern – someone passed away with a retirement plan with no death beneficiary who had a biological daughter who was subsequently adopted by another man – is not one that is likely to repeat on a regular basis. However, there are still lessons to be learned.

Not keeping beneficiary designations up-to-date or neglecting to make them in the first place is all too common in estate planning.

As illustrated by this case, when you fail to designate a beneficiary of your retirement plan you unnecessarily lose control over who the beneficiary is, and that means that it might be someone you would not have wanted to receive the money.

Be sure to review all of your beneficiary designations with your estate planning attorney.

For more information about estate planning, please visit my estate planning website.

Reference: Wills, Trusts & Estates Prof Blog (August 4, 2015) "Girl Adopted By Stepfather Entitled to Biological Father's Retirement Plan."

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