Beneficiary Designations: Getting the Right Assets to the Right People

Most people think of wills and trusts when they hear the words estate planning. However, an essential – and often overlooked – aspect of estate planning is making beneficiary designations and keeping them up to date after life changes. As more and more people put significant amounts of money into retirement accounts such as 401(k)s and individual retirement accounts (IRAs), making sure that the assets in those accounts are distributed to the right people is even more important.

According to the Wall Street Journal, 401(k)s and IRAs account for about 60 percent of the assets of U.S. households investing at least $100,000. Both state and federal laws affect to whom these assets may go, and the results can be complicated, especially when the owner of the account has been divorced and remarried. Therefore, the assistance of an experienced estate planning attorney is invaluable to help people make the correct beneficiary designations.

The Spouse Is the Automatic Beneficiary for Married People

A federal law, the Employee Retirement Income Security Act (ERISA), governs most pensions and retirement accounts. Under ERISA, if the owner of a retirement account is married when he or she dies, his or her spouse is automatically entitled to receive 50 percent of the money, regardless of what the beneficiary designation says.

If another person is the designated beneficiary, the spouse will receive 50 percent of the assets and the designated beneficiary will receive the other 50 percent. A spouse always receives half the assets of an ERISA-governed account unless he or she has completed a Spousal Waiver and another person or entity (such as an estate or trust) is listed as a beneficiary.

A spouse can forgo his or her right to 50 percent of the account by properly executing a Spousal Waiver. However, generally a Spousal Waiver is not permissible under ERISA unless the spouse is at least 35 years old, depending on the type of retirement plan.

These rules can cause problems when the owner of a retirement account remarries. Often, the owner will change his or her beneficiary designation upon divorce and name the children as the designated beneficiaries. If the owner later remarries, though, 50 percent of the retirement assets will go to the new spouse instead of the children, even if the new spouse is not added as a beneficiary.

Beneficiary Designation Trumps Will

If the owner of a 401(k) is single when he or she dies, the assets go to the designated beneficiary, no matter what his or her will states. In addition, the assets will be distributed to the designated beneficiary regardless of any other agreements – even court orders.

For example, assume a man’s wife is the designated beneficiary of his 401(k). The couple gets divorced and the man does not change his beneficiary designation, but the woman waives her right to receive any retirement assets as part of the divorce agreement. If the man dies without changing his beneficiary designation and without remarrying, his former wife will still receive the retirement assets, even though the divorce decrees declares that she should not.

IRAs Governed by State Law

In contrast to 401(k)s, IRAs are controlled by state law that does not automatically grant spouses beneficiary rights. By rolling a 401(k) into an IRA, an owner gains flexibility to name anyone as the designated beneficiary, with or without a spouse’s consent. Federal courts have confirmed that spouses do not have ERISA rights with IRAs.

These examples demonstrate the importance of carefully creating and updating beneficiary designations so they match the owner’s wishes for distribution upon his or her death. If you are married and you and your spouse do not want him or her to receive at least half of your retirement assets, consider executing a Spousal Waiver and ensure you have other beneficiaries designated for your retirement assets. If your former spouse gave up any claim to retirement assets in a divorce, make sure your beneficiary designation form is modified to reflect that change. Finally, converting a 401(k) to an IRA provides more options for designated beneficiaries.

For more information on how state and federal laws affect who will receive your retirement assets, contact a knowledgeable estate planning lawyer. An attorney can help you make your beneficiary designations so they reflect your desires and so the assets are eventually distributed to the person or people you wish to receive them.