How to Avoid a 401(k) Inheritance Disaster
Do you want your spouse to inherit the money in your 401(k) — or do you want your former spouse to get it? If you are divorced, remarried or have children from a previous relationship, make sure you have updated the beneficiary designation for your retirement plan at work. Otherwise, your spouse or kids could be in for a shock.
A shock is exactly what William Kennedy gave his daughter, Kari. The elder Kennedy married Kari’s mom in 1974 while working for DuPont. He named his wife as the beneficiary of his 401(k), and with no children at the time, he left blank the contingent beneficiary (who would get the money if the wife died first).
When the couple divorced in 1994, his ex-wife agreed to relinquish any rights to the money in the plan so that Kari would receive the money. But William did not sign new papers at work to officially change his beneficiary designation. So when he died in 2001, DuPont gave his ex-wife the proceeds — $400,000.
Kari sued DuPont, arguing that it violated the divorce decree by giving the money to her mother. The case made it all the way to the Supreme Court, which recently ruled in favor of DuPont. The majority ruled that DuPont acted in accordance with ERISA, the law governing retirement plans, which stipulates that beneficiary designations trump all other agreements.
The lesson: It’s not enough to sign a contract or write a will. If you want someone to be the heir of your retirement plan at work, you must stipulate your instructions on the plan documents. Have you reviewed your beneficiary designations lately to make sure that the people you want to get your money are really the people who will get your money? If you haven’t done so recently, ask your plan administrator to tell you in writing who its record show are your beneficiaries.
Footnote: The court noted that Kari could sue her mother based on the divorce agreement, but that won’t do her any good. She told her hometown newspaper The Enterprise that her mother died in 2007 after moving to Norway and spending all the money.
Ric Edelman is Chairman and CEO of Edelman Financial Services LLC, which manages billions of dollars for individuals and families nationwide. Ric is a frequent On the Money contributor and the author of seven books on personal finance, including his new #1 Bestseller, RESCUE YOUR MONEY.