A true story: A mother with two kids put them down as the beneficiaries of her nearly $200,000 401(k) account – but when she died, they got nothing. It’s all because of ERISA. Never heard of it? Neither had she.
By: Jedediah McClure, JD
Key Points
- ERISA Overview: Understand how the Employee Retirement Income Security Act (ERISA) can impact your estate plans.
- Beneficiary Risks: Learn how remarriage can inadvertently disinherit your children from your retirement plan.
- Preventive Strategies: Explore steps to safeguard your children’s inheritance, including spousal waivers and rollovers to IRAs.
Important Definitions
- ERISA: The Employee Retirement Income Security Act of 1974, a federal law that sets minimum standards for most voluntarily established retirement and health plans.
- Spousal Waiver: A legal document signed by a spouse giving up their rights to the other spouse’s retirement plan benefits.
- Prenuptial Agreement: A contract entered into prior to marriage outlining the division of assets and financial responsibilities in the event of a divorce.
The Impact of ERISA on Your Estate Plan
If you’re widowed or divorced and have named your children as the beneficiaries of your company retirement plan, you could be putting them at risk of being disinherited if you remarry. Due to a little-known ERISA rule, if your new spouse outlives you, they will receive your company plan funds, rather than your children — even if you have put your children down as your named beneficiaries.
The purpose of ERISA is to ensure that survivor benefits go to the surviving spouse, preventing them from being bypassed. However, this rule can lead to unintended consequences, as illustrated by the sad story of Susan Thompson.
The Sad Story of Susan Thompson
Susan Thompson named her husband of over 30 years, John Thompson, as the beneficiary of her 401(k) plan. After his death, she updated her beneficiary form, naming her two adult children as the new beneficiaries. In 2012, Susan remarried Robert Johnson. Just a few months later, she passed away unexpectedly, leading to a dispute between her children and her new husband. Despite naming her children as beneficiaries, the courts awarded the 401(k) assets to Robert Johnson due to ERISA regulations.
ERISA: A Rule with Good Intentions, But Bad Results
Susan was unaware that federal law requires qualified plans, including 401(k)s, to give surviving spouses the right to inherit all the money in the account — unless the spouse signs a spousal waiver giving up their rights. The waiver must be signed during the marriage to be valid. Prenuptial agreements signed before marriage do not serve as valid waivers for company plans.
How to Avoid This Problem
1. Use Prenuptial Agreements Wisely
While a prenuptial agreement cannot waive spousal rights to receive the company plan, it can include a provision requiring the new spouse to sign a valid spousal waiver immediately upon marriage. The prenup can also outline remedies or penalties if the new spouse does not sign the waiver as agreed.
2. Consider Rolling Over to an IRA
If you can roll your company plan over to an IRA before the marriage, this can solve the problem since IRAs are not subject to ERISA rules. Even after marriage, many company plan administrators do not require spousal permission for a rollover to an IRA. Once moved to an IRA, you can name any beneficiary you wish without worrying about ERISA.
3. Plan Before Remarriage
Entering a second marriage later in life presents its own set of challenges. Ensuring your company plan assets go to the intended beneficiaries requires careful planning before tying the knot. Discuss these issues with your future spouse and seek professional advice to avoid future resentment and stress.
Steps to Take If You Are Already Married
1. Review and Update Beneficiaries
Regularly review and update your beneficiary designations to ensure they align with your current wishes and family situation.
2. Discuss with Your Spouse
Have open discussions with your spouse about estate planning and the importance of signing spousal waivers to protect your children’s inheritance.
3. Seek Professional Help
Work with an estate planning attorney and financial advisor to ensure all documents are in place and up to date. This can prevent future legal battles and ensure your estate plan is executed as intended.
Considerations for Blended Families
Blended families face unique challenges in estate planning. Ensure that your plan addresses the needs and rights of children from previous marriages while also considering the interests of your new spouse.
Frequently Asked Questions (FAQs) for Illinois Residents
Q: Can I use a prenuptial agreement to waive ERISA rights?
A: No, a prenuptial agreement cannot waive ERISA rights. The waiver must be signed during the marriage.
Q: What happens if my spouse refuses to sign the waiver?
A: If your spouse refuses to sign the waiver, the assets will default to them upon your death. Discuss alternatives with your estate planning attorney.
Q: Can I roll over my 401(k) to an IRA without my spouse’s consent in Illinois?
A: In many cases, you can roll over your 401(k) to an IRA without spousal consent, but this depends on the plan administrator’s policies. It’s essential to confirm with your plan administrator and seek professional advice.
Q: What are the inheritance rights of children from a previous marriage in Illinois?
A: In Illinois, children from a previous marriage do not automatically have inheritance rights to your estate if you remarry. Proper estate planning, including updating beneficiary designations and creating a will or trust, is crucial to ensure your wishes are followed.
Q: How can I ensure my children’s inheritance is protected if I remarry?
A: To protect your children’s inheritance, consider strategies such as prenuptial agreements with provisions for spousal waivers, rolling over retirement plans to IRAs, and setting up trusts. Consult with an estate planning attorney to create a comprehensive plan tailored to your situation.
Resources and Further Reading
For further information and resources on estate planning and ERISA regulations, consider the following:
- Department of Labor: ERISA Information
- Books on estate planning and retirement benefits
- Articles from reputable financial planning websites
Take Action Now
Understanding the implications of ERISA and taking preventive steps can help ensure your children’s inheritance is protected. If you need assistance navigating these complex rules or have questions about your estate planning, contact me today. At Supernus Law, we specialize in creating comprehensive estate plans tailored to your unique needs. Schedule a consultation with me, Jedediah McClure, and ensure your assets are distributed according to your wishes.
Contact Information:
- Phone: (618) 354-0302
- Email: jed@supernuslaw.com
- Website: Supernus Law Website
Don’t let obscure rules jeopardize your family’s future. Let’s work together to secure your legacy and provide peace of mind for you and your loved ones.
