Rule No. 1: With 401(k)s, your spouse is the presumed beneficiary of your account upon your death—regardless of who is listed on the beneficiary form—unless he or she previously consented to your naming someone else beneficiary. These plans are governed by the federal Employee Retirement Income Security Act, or ERISA. Under this law, plans can provide for those spousal rights to kick in immediately, or no later than a year after the marriage. This general rule cannot easily be circumvented with a prenuptial agreement. Only a spouse can waive the right to 401(k)-plan assets—those who are engaged cannot.
If you are contemplating remarrying and are concerned about providing for children from a prior marriage, consider rolling your 401(k) to an IRA, where you have more latitude to name beneficiaries of your choosing.
Rule No. 2: If you are single when you die, your 401(k) assets pass to the person designated on your beneficiary form—regardless of what your will says or what other agreements you made before your death. The U.S. Supreme Court has said so.
Example: William and Liv Kennedy called it quits after 20-plus years of marriage. As part of their divorce agreement, Liv waived her rights to any benefits under William's DuPont Co. retirement plan. William never remarried. He also never changed the beneficiary designation on his retirement account from Liv.
When William died, a dispute arose between Liv and the couple's daughter, Kari Kennedy, over who had the right to the funds in the DuPont plan.
After conflicting rulings in the lower courts, the Supreme Court agreed to hear the case and in a unanimous decision in 2009 held that the person named on the beneficiary form gets the money—even if that person happens to be the employee's ex-spouse, and even if that ex-spouse waived any right to the money in a divorce agreement. Kari Kennedy was disinherited.
The lesson: If you get divorced and your ex-spouse gives up any claim to your 401(k), update your account paperwork with the name of your new beneficiary.
Rule No. 3: With IRAs, which are subject to state law, you generally can name anyone you like as the beneficiary, with or without your spouse's consent. (Certain restrictions apply in community-property states.)
Example: Wayne Wilson married Katherine Chandler in 2000. Two years later he opened an IRA at Charles Schwab Corp. and named his four grown children from a prior marriage as beneficiaries. Three years after that, at the age of 65, he died.
His wife tried to claim the IRA assets, arguing they had originated from Wilson's Siemens AG 401(k) plan.
But last year the U.S. Court of Appeals for the Ninth Circuit awarded them to the children, ruling that spouses have no ERISA rights to IRA benefits.
What if you designate your spouse as your IRA beneficiary and later get divorced? Under most states laws, the designation would become null and void upon your death, unlike with 401(k)s. Your assets will pass according to the default plan laid out in the IRA document—typically to your estate if you are single, he says.
If you actually want your ex-spouse to inherit your IRA, you must fill out a new beneficiary form indicating so.
Rule No. 4: Workers generally don't need a spouse's consent to cash out a 401(k) or roll it to an IRA when they change jobs or retire. Although employers may impose such a rule, the vast majority do not, as there is no federal law requiring them to do so.
What it means, is that once you change jobs or retire, there is usually nothing preventing you from spending the money on a trip to Tahiti or rolling it to an IRA and leaving it to the gardener, rather than your spouse.
To be sure, most states have laws ensuring that a spouse cannot be totally disinherited. These rules might guarantee that your spouse will receive at least one-third to one-half of your estate. But, this is cold comfort to spouses who have little retirement savings of their own, perhaps because they interrupted a career to care for children.
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