While we plan our estate, we think planning for our belongings and properties, however, there are some accounts whose distribution is decided according to the beneficiary designated in their documents and are not overpowered by a will. Yes, we are talking about accounts like transfer on death, saving accounts, insurance policies, retirement accounts, etc. In this article, we will be discussing the funds held in the 401(k) plan and naming their beneficiaries.
Estate Planning-
A 401(k) plan is a defined contribution retirement saving account offered to the employees by the employers in which the employees can contribute a portion of their salary on a tax deferred basis. Employer can also match the employee’s contribution in the plan up to a certain limit. Under this plan you need to designate beneficiaries both the primary and the contingent as well to hand over the assets in case of your demise. If the owner of the 401(k) plan gets deceased, then the assets in the plan will be transferred to the beneficiaries nominated in the account and are not divided otherwise what you have mentioned in your will and probate‘s decision in absence of a will.
Thus, it can be said that by doing so, you can avoid the money and time-wasting process of probate while ensuring smooth transfer of the assets to the beneficiaries. However, you need to review and update the beneficiary designation on a regular basis according to your wishes else the assets might be owned by someone whom you might not want now. Also, if the beneficiary has died and the designation has not been updated by you then your asset will be subjected to probate which will be wastage of time and money.
How to name beneficiary in 401(k) accounts-
Nominating a beneficiary for the 401(k) account can sometimes be very complicated as it requires certain aspects that need to be considered especially in cases when the beneficiary is a minor or not your spouse. Below are certain scenarios to explain the complexity involved:
1. You are married: In such cases, your partner becomes the beneficiary of your account according to the 401(k) plan guidelines. However, you might need to put that on record as well. However, if you want to designate someone else as your beneficiary, then you need to get signed a waiver by your spouse which must be hand written as well otherwise he/she will have a legal claim and your designated beneficiary will not get the benefit.
2. You are single: In such cases, you can name anyone as the beneficiary according to your wishes, but if you forget to do that then it will go to your estate. If you are a single parent and your children are the beneficiaries of the account, however, you want to marry or remarry then a waiver signed by your spouse is required to let your children get the benefits. It is to be noted that a prenuptial agreement won’t help you to sort this as at that time you were not married and thus the court doesn’t consider it.
3. You have minor children as beneficiaries: In such cases, as the plans don’t transfer the money directly to the minors, you need to plan very carefully. In such cases, the court intervenes and appoints a custodian or trust to take care of your assets till your children become adults. Thus, to avoid this time and money wasting process, you must designate a testamentary trust as the beneficiary in whom the trustee manages the asset until the trust expires and the beneficiary get the assets. This can also be considered if your children are spendthrift.
Apart from designating a primary beneficiary for the 401(k) plan in any of the above mentioned scenarios, you must also select a contingent beneficiary as well. In case your primary beneficiary is deceased, then the contingent beneficiaries can get the assets. In case you have multiple primary or contingent beneficiaries, then you must ensure that you have defined their shares clearly so that there would not be a dispute when you pass away. As the 401(k) plan isn’t overridden by a will, you must ensure that you have clearly mentioned the shares of the beneficiaries.
It is advised to review and update your beneficiary decisions once in a year and after every life changing event like marriage, divorce, child-birth, etc. In case you don’t designate a beneficiary or have not updated it, it might lead to dispute and thus a probate court needs to intervene which could delay the distribution and might prove costly as well. If you have multiple 401(k) accounts, then you need to review and update them according to your current wishes. It is also advisable to inform your beneficiaries about these accounts so that they are aware of such accounts and can claim your assets after your demise.
As the 401(k) plan funds transfer doesn’t follow similar terms like a will, hence it is necessary to designate the beneficiaries according to your current wishes to save them from the time and money-wasting process of probate. By designating the beneficiaries, you can get relaxed that there would be a smooth transfer of assets in the 401(k) account to your loved ones.
