If a working spouse participating in a company retirement plan passes, the surviving spouse receives 100% of the 401(k) unless that partner has specifically waived the right to inherit the asset and the waiver is properly documented. This is the result of a federal law designed to protect spouses.
When a worker takes a retirement plan payout as an annuity, he or she must select a plan that will continue lifetime payments to the surviving spouse equal to at least 50% of the original benefit amount. A spouse can also waive that right, but again, this must be in writing.
Kiplinger’s August 2016 article, “What Happens to Your 401(k) When You Die–Like It or Not,” reports that when President Reagan signed that rule into law back in 1984, he proudly said, “no longer will one member of a married couple be able to sign away survivor benefits for the other.”
The protection for a surviving spouse is so powerful that, in some cases, it’s superior to properly named beneficiaries. Further, this rule can’t be unset by a pre- or post-nuptial agreement where a spouse waives the death benefit. A pre-nup doesn’t do it because a spouse, not an engaged individual, must waive the benefit, and a post-nup has no authority—unless the spouse actually signs a written waiver. A single person, however, can designate whomever they choose as beneficiary.
While there are clear rules for the protection for a survivor’s rights, there are other planning options while the 401(k) owner is alive. There’s actually a loophole to the tune of $1 million in a lump-sum distribution. When a married worker leaves a job, most 401(k) plans permit the employee to roll over the balance to an IRA without notifying the spouse. Once the money is in the IRA, the death benefit protection is gone.
That can be helpful for those who’d like to pass retirement assets to children or grandchildren after they’re gone. If retirement assets make up a significant portion of your net worth, you may want to consider the benefits of inherited IRA planning. By using a trust as a beneficiary, you may be able to pass assets to your child or grandchild in a creditor-, divorce- and tax-protected manner. You’ll want to speak with an experienced estate planning attorney, however, when considering this planning option.
In most states, an IRA owner can name anyone as beneficiary of the account. However, in community property states, you may need spousal consent to name someone other than your spouse as beneficiary of more than 50% of the account.
There are, however, some plans that require spousal consent for a distribution, such as when the default benefit under the plan is a joint annuity with the participant’s spouse. Otherwise, to claim benefits, such as a lump-sum distribution to be rolled into an IRA, the spouse must agree. It’s pretty rare among 401(k) plans. Plans that require a 100% death benefit for a spouse typically don’t demand spousal consent for a lump-sum payout.
It’s just as important that you understand the rules of your retirement plan and your spouse’s retirement plan. You don’t want either one of you to find out what the rules are when it’s too late to make a change. Also, make sure you know what the requirements are for a waiver. Does the document need to be notarized to be enforceable, or is a particular form required? Details can make or break your 401(k) distribution.
That’s why at Family Estate Planning Law Group, we emphasize the need to align your assets with your estate plan, get verification from financial institutions of the correct alignment and then work with you to track changes in your assets over time. Without taking these measures, it’s easy to overlook a 401(k) rule that might throw off your whole estate plan. We work with clients to submit the proper documentation to 401(k) or IRA custodians and receive confirmation back that it’s been correctly aligned with their plans.
For more information on the importance of aligning, verifying and tracking assets, explore our website and contact us to schedule your consultation today!
Reference: Kiplinger’s (August 2016) “What Happens to Your 401(k) When You Die – Like It or Not”