When you first establish your 401k plan, you will be required to designate a beneficiary to receive the balance of the account in the event you pass away. For most people, especially married couples, this seems like a simple task. However, there are some factors that you should consider before making this decision. There are some potential problems to avoid with 401k beneficiary designations. Here is what you need to consider.
Shouldn’t my spouse be my primary beneficiary?
For those of us who are married, it may seem like a no-brainer. You should designate your spouse as your primary beneficiary, right? Well, actually, you have no choice. Federal law says that your spouse is automatically the beneficiary of your 401k. Nevertheless, you need to fill out the beneficiary form with your spouse’s name. In order to name someone other than your spouse as beneficiary, your spouse must sign a waiver of his or her rights to a qualified joint and survivor annuity or a qualified pre-retirement survivor annuity. The manner and timing in which these waivers are executed is crucial. A simple waiver of these rights in a premarital agreement is insufficient to satisfy the waiver rules.
Who should I name as beneficiary if I am single?
If you are single, your 401k account goes to your named beneficiary if you die. If you do not designate anyone, the default beneficiary under most 401(k) plan documents is your estate, which can result in disastrous tax consequences. If you have children you may consider naming them as beneficiary. If you remarry, you will have to decide whether to change your beneficiary designation. Automatically, after a year your new spouse will take precedence over your children, by law. The only way around that is to have your new spouse sign a waiver of his or her rights to a qualified joint and survivor annuity or a qualified pre-retirement survivor annuity.
Naming Your Minor Children as Beneficiaries
If your children are minors, you should carefully consider whether or not to name them as beneficiaries. That is because, in most cases, the proceeds cannot be transferred directly to a minor. Instead, the court will need to appoint a trustee or guardian, to manage the money for the benefit of the children. This can be a time-consuming process. In addition, the minor child will obtain complete control over the account upon reaching the age of majority, which is 18 in most states. You can also consider creating a trust for your minor children, and naming the trust as the beneficiary of your 401k. This method will take less time than a court proceeding, while allowing the money to be invested easily through the trust. Special care must go into the drafting of a trust designed to receive 401(k) proceeds to ensure that a child’s life expectancy may be used for purposes of calculating minimum required distributions after your death.
For those who are not married but have a domestic partner, naming your partner as your 401k beneficiary can be helpful in more ways than one. From a legal standpoint, naming a domestic partner as beneficiary can be seen as evidence necessary when registering as domestic partners in states where this option is available. It can also be used as evidence to obtain domestic partner health benefits, where applicable. The only thing to consider, in this situation, is whether or not family members may object or appeal the transfer of benefits.
If you have questions regarding 401k beneficiaries, or any other retirement planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.
Gerald Dorn is a shareholder and has been a partner at Anderson, Dorn & Rader, Ltd. Since 1998. Mr. Dorn has extensive experience serving wealthy families and business owners in the development of estate, tax and asset protection planning strategies. He made the decision to focus his practice in the area of estate planning after witnessing the personal grief and financial loss suffered by several of his clients as a result of poor planning. These experiences motivated him to dedicate his professional life to assisting his clients to preserve their life’s work for their heirs and to create a lasting legacy for those they love. Mr. Dorn is able to accomplish his mission through the use of a vast number of estate planning tools, both basic and advanced, for all of his clients at Anderson, Dorn & Rader, Ltd.