What You Need to Know about Naming a Beneficiary

By Brenda Watson Newmann

It's a delicate subject, but it's one you need to consider. What will happen to your 401(k) account if you die? In this article, the first of a two-part series, we look at issues to consider when naming a beneficiary for your 401(k) account.

Choosing a Beneficiary - Not Necessarily As Easy As You Think

When you signed up for your 401(k) plan, you were asked to choose a beneficiary - someone who would receive the account money in case you should die.

This may seem like a no-brainer, especially if you are married, but it's not that simple for everybody. There are certain things you need to keep in mind, especially if you are separated or single, or if you are thinking of naming your minor children as beneficiaries.

If You Are Married

If you are married, federal law says your spouse is automatically the beneficiary of your 401(k) or other pension plan - period. You should still fill out the beneficiary form with your spouse's name, for the record.

If you want to name a beneficiary who is someone other than your spouse, your spouse must sign a waiver. The waiver MUST be in writing.

For example, you might be separated from your spouse - not divorced - and want to name a new beneficiary. Even if your intended beneficiary is a domestic partner you've been with for 20 years, your spouse will have legal claim to your 401(k) if you die, unless he or she signs a waiver.

If You Are Single

If you are single when you die, your account will go to whomever you named as a beneficiary. If you have not named anyone, the account will go to your estate.

Single parents, take note! You may have named your child or children as beneficiaries for your 401(k) plan. You may want to keep this arrangement even if you remarry - perhaps your children would need the money more than your new spouse would. But remember, once you remarry your spouse will automatically take precedence over your children as beneficiary of your account. The form naming your children as beneficiaries is not valid unless your spouse signs a waiver.

And don't rely on a prenuptial agreement to sort this out, says noted 401(k) expert Ted Benna. "The spouse isn't the spouse when the pre-nuptial agreement is signed" and therefore the agreement may not hold up in court.

Should You Name Your Minor Children As Beneficiaries?

If your children are your beneficiaries, and they are minors, consider this carefully. Most plans will not transfer money directly to a minor. A court will have to appoint a trustee or guardian to receive the money - and that could take some time. You might want to think about choosing a trustee (person or institution) now, and naming your children's trust as your beneficiary. This way the money can be transferred, and invested, with less delay.

Even if your children are no longer minors you still might have concerns about their ability to manage a large sum of money. In this case you might want to consider setting up trust in their name, and making the trust the beneficiary, rather than permitting a direct transfer to your children.

Be sure to consult with a tax advisor before naming a trust as a beneficiary, however, to ensure that the trust meets the stringent IRS requirements for qualifying as a designated beneficiary.

Domestic Partners

If you are not married but have a domestic partner, naming that person as your 401(k) beneficiary could actually help concretize your domestic partnership from a legal point of view, says Pete Warner, Senior Manager with Deloitte and Touche's Human Capital Advisory Services group in San Francisco.

The action could be used as evidence when registering as domestic partners in cities where that is an option, and it could also be used as evidence to obtain domestic partner health benefits.

To avoid any surprises, if you name your domestic partner as a beneficiary it might be a good idea to see how local courts have supported (or not) any past appeals by family members against a domestic partner named as a beneficiary, Warner said.

A Final Word

A lot of us think we're immortal, or at least we act that way by not planning for the eventuality of our unexpected death. The fact is, you never know what's going to happen. It's a good idea to make sure you have things organized the way you want them to be. After all (to take Woody up a notch) once you die, you won't be there to sort things out.

Tax Considerations When You Inherit a 401(k): Part 2

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

What You Need to Know about Naming a Beneficiary

By Brenda Watson Newmann

It's a delicate subject, but it's one you need to consider. What will happen to your 401(k) account if you die? In this article, the first of a two-part series, we look at issues to consider when naming a beneficiary for your 401(k) account.

Choosing a Beneficiary - Not Necessarily As Easy As You Think

When you signed up for your 401(k) plan, you were asked to choose a beneficiary - someone who would receive the account money in case you should die.

This may seem like a no-brainer, especially if you are married, but it's not that simple for everybody. There are certain things you need to keep in mind, especially if you are separated or single, or if you are thinking of naming your minor children as beneficiaries.

If You Are Married

If you are married, federal law says your spouse is automatically the beneficiary of your 401(k) or other pension plan - period. You should still fill out the beneficiary form with your spouse's name, for the record.

If you want to name a beneficiary who is someone other than your spouse, your spouse must sign a waiver. The waiver MUST be in writing.

For example, you might be separated from your spouse - not divorced - and want to name a new beneficiary. Even if your intended beneficiary is a domestic partner you've been with for 20 years, your spouse will have legal claim to your 401(k) if you die, unless he or she signs a waiver.

If You Are Single

If you are single when you die, your account will go to whomever you named as a beneficiary. If you have not named anyone, the account will go to your estate.

Single parents, take note! You may have named your child or children as beneficiaries for your 401(k) plan. You may want to keep this arrangement even if you remarry - perhaps your children would need the money more than your new spouse would. But remember, once you remarry your spouse will automatically take precedence over your children as beneficiary of your account. The form naming your children as beneficiaries is not valid unless your spouse signs a waiver.

And don't rely on a prenuptial agreement to sort this out, says noted 401(k) expert Ted Benna. "The spouse isn't the spouse when the pre-nuptial agreement is signed" and therefore the agreement may not hold up in court.

Should You Name Your Minor Children As Beneficiaries?

If your children are your beneficiaries, and they are minors, consider this carefully. Most plans will not transfer money directly to a minor. A court will have to appoint a trustee or guardian to receive the money - and that could take some time. You might want to think about choosing a trustee (person or institution) now, and naming your children's trust as your beneficiary. This way the money can be transferred, and invested, with less delay.

Even if your children are no longer minors you still might have concerns about their ability to manage a large sum of money. In this case you might want to consider setting up trust in their name, and making the trust the beneficiary, rather than permitting a direct transfer to your children.

Be sure to consult with a tax advisor before naming a trust as a beneficiary, however, to ensure that the trust meets the stringent IRS requirements for qualifying as a designated beneficiary.

Domestic Partners

If you are not married but have a domestic partner, naming that person as your 401(k) beneficiary could actually help concretize your domestic partnership from a legal point of view, says Pete Warner, Senior Manager with Deloitte and Touche's Human Capital Advisory Services group in San Francisco.

The action could be used as evidence when registering as domestic partners in cities where that is an option, and it could also be used as evidence to obtain domestic partner health benefits.

To avoid any surprises, if you name your domestic partner as a beneficiary it might be a good idea to see how local courts have supported (or not) any past appeals by family members against a domestic partner named as a beneficiary, Warner said.

A Final Word

A lot of us think we're immortal, or at least we act that way by not planning for the eventuality of our unexpected death. The fact is, you never know what's going to happen. It's a good idea to make sure you have things organized the way you want them to be. After all (to take Woody up a notch) once you die, you won't be there to sort things out.

Tax Considerations When You Inherit a 401(k): Part 2

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.