Your firm has the best of intentions for your estate planning clients.  But, good intentions alone are not a defense in a malpractice case. Are you aware of some of the traps in 401(k) and IRA accounts?

For example, regardless of what a Will or a Trust says, 401(k) accounts and IRA accounts have a beneficiary designation, which controls. So, even though the Trust and Will say to leave everything to your sister, if your beneficiary designation says to give it to the ex-girlfriend, the ex- gets it.

What often happens is that heirs and loved ones discover they’ve been left out of a significant part of the estate – and they have little or no recourse. It happens all the time, especially in the case of a divorce or a second marriage.

What is astounding is that IRAs and 401(k)s account for about 60% of the assets of U.S. households with $100,000 or more to invest. Upon death, such accounts can blindside heirs, as well as you as an estate planning attorney.

It doesn’t help that the maze of laws regarding retirement plans is often confusing. People take their accounts for granted and often don’t pay much attention to keeping their beneficiary designations up-to-date. Consider the following:

1. When a single person dies, regardless of what their Will says, their 401(k) assets go to the designated beneficiary of the account. This can be the case even if the person had other intentions regarding the distribution of their 401(k) assets.

2. In marriage, the spouse is conclusively presumed to be the beneficiary of a 401(k) account even if someone else had been named a beneficiary, unless the spouse has consented otherwise. Note, the spouse cannot consent in a pre-marital agreement because prior to marriage the spouse is not a “spouse.” The spouse also cannot consent prior to age 35.

3. Depending on the state, IRAs (which are subject to state law) may allow an account holder to name anyone as a beneficiary; they don’t necessarily require a spouse’s consent.

4. There is normally no spousal consent needed for a worker to cash out their 401(k) or IRA, or roll a 401(k) into an IRA when they leave the company they’re with or retire. So, in theory, a worker could quit their job, roll the money to an IRA, abandon their spouse, jet to Tahiti with the Tennis pro, and name the Tennis pro as beneficiary on the IRA.

So, what do you need to do to avoid being blindsided?

You need to be proactive. Get the actual beneficiary designations so you are sure precisely how they really read. Clients often think beneficiary designations provide one thing when they really say another.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
www.aaepa.com