When is the last time you review your 401(k) or 401(a) beneficiary designation? Most likely it was when you joined the plan. For many individuals this is something that is often stuffed into the memory storage locker to be buried behind all of the “honey do lists”, work related projects and just about everything else that comes up in our daily lives. Unless you are forced to dig through your locker to retrieve this information, it is often forgotten and may ultimately end up on an A&E episode of “Storage Wars”. However, rather than Darrell and Dave fighting over your 401(k) after your passing, it might be those who you leave behind.
In a recent case, Cajun Industries, LLC vs. Robert Kidder, et al., the deceased father, Leonard Kidder, had his first wife as his 401(k) beneficiary. After she passed away Mr. Kidder designated his three children as beneficiaries. Simple enough – if your wife is deceased then your children become your beneficiaries. Not so fast. If you find new love and companionship and decide to remarry, the rules change. Mr. Kidder found new love and remarried but unfortunately for him, he died six into his new marriage (maybe his heart could not keep up with his younger bride – lesson to men who seek younger wives – may lead to an early grave).
The children thought they were entitled to their father’s 401(k) per his beneficiary designation. Unfortunately for the children, their father was not aware of the Employee Retirement Income Security Act, “ERISA”, a federal law which governs all retirement plans (note, this does not apply to IRAs). Under ERISA, the new Mrs. Kidder, surviving spouse, is entitled to her late husband’s entire 401(k) despite his beneficiary designation. To the dismay of her assuredly loving and doting stepchildren, she claimed it. Why not, after a lengthy marriage of 6 weeks she should be entitled to something.
This is why I tell those people who prefer the “lone wolf” do-it-yourself legal work with the assistance of Legal Doom and others that you don’t know what you don’t know. ERISA required Mr. Kidder to fill out a new beneficiary form after he remarried and to obtain the consent of his new wife. Because his wife had not consented to his designation in favor of his children, ERISA required the account to be distributed to his wife. The children were left with nothing.
There were two other potential solutions that would have allowed the funds in the 401(k) account to go to Mr. Kidder’s children. Prior to getting married, Mr. Kidder could have asked his wife to sign a prenuptial agreement wherein she agreed to sign a waiver of his 401(k) plan. Alternatively, before he married, Mr. Kidder could have rolled his 401(k) account to an IRA and then designated his children as beneficiaries of his IRA. The rules requiring a spousal waiver to a beneficiary designation do not apply to IRAs.
Don’t Kid yourself into believing entity planning is easy and does not require the assistance of qualified professionals. It is sometimes the small mistakes that result in disastrous consequences.