Even with the many concerns over retirement accounts in America, it’s undeniable - IRAs and 401(k)s represent a lot of personal wealth for everyday Americans. That means retirement accounts are assets uniquely worthy of particular attention, to plan for when it comes to their role in your estate plan. Indeed, amongst households with $100,000.00 or more to invest, 60% of the household’s assets are in an IRA or 401(k).
So, how ought retirement accounts factor into your estate planning? Who will inherit them? The answer is not a simple as you may think. Truth be told, the problem with retirement accounts is the crazy quilt of laws governing their distributions, and moreover, different laws apply to 401(k)’s and IRAs.
The inheritance of retirement accounts is a lively topic and the The Wall Street Journal has recently offered a piece on the issue. While I recommend the full article for your reading file, let’s review a few of the highlights here.
With 401(k)s, the overarching rules are in place thanks to the federal Employee Retirement Income Security Act (ERISA). If you are married, the 401(k) automatically passes to your spouse and does so regardless whether your spouse is listed as the designated beneficiary, unless your spouse waives his or her right to your 401(k). By the way, if you have a premarital agreement, your intended spouse cannot effectively waive rights in your 401(k) until after you are actually married. Plan (and/or update your plan) accordingly.
What if you have children from a former marriage and you want to include them as beneficiaries along with your current spouse? Consider “rolling” your 401(k) into an IRA and making the beneficiary designations per your wishes. You may want to consider this even if your children are beneficiaries under your will and trust. Why? The beneficiary designations on file with the retirement plan administrator trump any arrangements that are set forth in your will and trust. In fact, the U.S. Supreme Court has ruled that, despite any state law to the contrary, your ex-spouse will inherit your 401(k), if he or she is the last designated beneficiary on file with the plan administrator.
IRAs are governed by state law and that, by and large, makes them easier to deal with. Without the inflexibility of the ERISA laws, when it comes to your IRA it’s all about who is named as the beneficiary (unless there is a state law to the contrary). One thing remains consistent, however. The beneficiary on file with the plan administrator takes precedence over any provisions in your will and trust. There are some exceptions to this general rule. One such exception is that New York State (and many other states) don’t allow you to completely disinherit a spouse. Another exception is that we also have laws that automatically disinherit an ex-spouse as beneficiary, unless you’ve completed the extra paperwork to confirm your intent to include your ex-spouse as beneficiary.
So what is the bottom line surrounding retirement accounts? Retirement accounts are important assets for many Americans. Given the complex tangle of laws that control your options, it is essential that you consult with competent legal counsel and coordinate the distribution of your retirement accounts as part of your overall estate planning. Be sure to consult an estate planning attorney licensed to practice in your state of residence, as state property laws may need to be evaluated, too.
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