By Bryce Crawford
The beneficiary designation on 401(k) and IRA accounts is the most commonly overlooked, and one of the most important aspects of estate planning and wealth management. By recent estimates, Americans currently have $5.9 trillion invested in 401(k) plans and another $6.5 trillion in IRAs. For the most part, the distribution of the assets in your retirement accounts upon your death is not governed by your will or trust, but rather the beneficiary designation on the account itself and the federal Employee Retirement Income Security Act (ERISA).
The beneficiary designation on 401(k) and IRA accounts is the most commonly overlooked, and one of the most important aspects of estate planning and wealth management. By recent estimates, Americans currently have $5.9 trillion invested in 401(k) plans and another $6.5 trillion in IRAs. For the most part, the distribution of the assets in your retirement accounts upon your death is not governed by your will or trust, but rather the beneficiary designation on the account itself and the federal Employee Retirement Income Security Act (ERISA).
The importance of updating
your beneficiary designations on your retirement accounts following changes in
your life cannot be understated. Many
times, these designations were jotted down quickly years ago as you filled out
pre-employment paperwork. In order to
ensure that your hard earned assets pass according to your intent upon your
death, you should update you beneficiary designations any time you get married,
divorced, have children or undergo any other major life changes.
Here are some key rules
governing retirement accounts to help you make the right designations as your
family grows and changes.
Rules for Your 401(k)
No. 1: If you are married, upon your death your spouse is automatically
entitled to 50 percent of your account regardless of whether someone else is
the named beneficiary. If another person
is the named beneficiary, your spouse will receive 50 percent of the assets and
the named beneficiary will receive the other 50 percent. Your spouse can sign a waiver of his or her
right to 50 percent of the account.
However, this cannot be done by prenuptial agreement. Only a spouse
can waive this right, not a fiancé.
No. 2: If you are single when you die, your 401(k) assets
pass to the designated beneficiary on the account no matter what your will
states. If you get divorced and your ex-spouse
does not receive rights to any part of your 401(k), you MUST update your
beneficiary form with the name of your new beneficiary. If you die single leaving your ex-spouse
named as the beneficiary of your 401(k), he or she will receive the account even
if your will designates that all of your assets go to your children.
Rules for Your IRA
No. 3: Unlike 401(k) plans which are governed by federal
law, IRA accounts are governed by state law and afford you much more freedom in
designating a beneficiary. Generally,
you may designate anyone you like as the beneficiary of your IRA without your
spouse’s consent and your spouse will have no interest in that account upon
your death if he or she is not the beneficiary.
Also unlike 401(k) plans, if you name your spouse as the beneficiary of
your IRA and later divorce, that designation is null and void upon your death
under most state laws. In that instance,
your account would pass according to the default plan laid out in your IRA
document.
Recent statistics show that
401(k)s and IRAs make up approximately 60 percent of the assets of U.S. households
investing at least $100,000. Assuring
that these assets pass according to your intent upon your death can become
complicated with both federal and state laws controlling those accounts,
especially when the owner of the accounts divorces, remarries, or has
subsequent children. The help and
knowledge of experienced estate planning attorneys is often necessary and
invaluable to ensure that you make the proper beneficiary designations. For
more information contact the experienced estate planning attorneys at the
Williams Law Group.
The Williams Law Group, PLC
4201
W. New Hope Rd., Suite 202
Rogers,
AR 72758
Phone: (479) 633-8421
Fax: (479) 633-8058
