Who Will Inherit Your 401(k) After You Pass Away?

Possibly not the person you think!

According to Cogent Research LLC, IRAs and 401(k)s account for approximately 60% of the assets of households in the United States who have at least $100,000 in invest. But what most people do not understand is this investment vehicle is surrounded by very complex rules affecting who will inherit the money in the 401(k).

The case of the 401(k) of Leonard Kidder is a perfect example of the complexities involved in 401(k) plans and their inheritance rules. Leonard worked for Cajun Industries for almost 20 years. He named his wife of 41 years as the beneficiary of his 401(k) account if he should pass away before her. Unfortunately for his wife, she passed first. After his wife’s death, Leonard updated the beneficiary designation form for his 401(k) plan and named his three children as beneficiaries of the account. Leonard remarried; however, he passed away six weeks later.

Leonard’s children believed that they were named as beneficiaries and attempted to claim the funds in the 401(k) account, but Leonard’s employer denied their claim and asked that a court decide to whom the funds belonged. To most people, this seems illogical since the children were named as the beneficiaries on Leonard’s 401(k) account. Nevertheless, the federal Employee Retirement Income Security Act (ERISA) provides that upon your death, your current spouse is the presumed beneficiary of your 401(k) account unless your spouse previously waived this right in writing.

Leonard’s second wife never waived her rights under ERISA, and, despite being married only six weeks, she was awarded approximately $250,000, which was Leonard’s entire 401(k) account. His children received nothing.

To further complicate matters, this ERISA law cannot be circumvented by your will, trust, prenuptial agreement or any other legal document signed before your death.

The moral of Leonard’s story is to update your beneficiary designation form for your 401(k) account frequently and certainly after a marriage.