Two estate planning instructions that may be nullified— by the law

In America, there is no right to inherit. You can leave your wealth to whomever you want—even if you exclude your immediate family. However, the law does render ineffective certain methods for leaving assets to someone other than your spouse.

The two problem areas pertain to wills, and employer sponsored retirement plans such as 401(k)s and f403(b)s.

Failure to provide for a spouse under the terms of your will. If your spouse is not a beneficiary under the terms of your will, he or she can “renounce” your will and take a “statutory share.”

The statutory share is one-third (1/3) if you have children and one-half (1/2) if you do not.

This often comes up in second marriages. Each spouse may want to provide for his or her own children from the previous marriage even if the other spouse is still living. Without proper planning, the new spouse could take a large share of the wealth intended for your children by exercising the right to renounce.

The solutions: The Living Trust or a prenuptial agreement. In Illinois there is no spousal right to renounce against a living trust. Trust assets will pass to your intended beneficiaries even if your spouse is excluded.

But caution! If the assets are not owned by your trust at the time of your death then the mere existence of the trust will not prevent your spouse from renouncing. Don’t neglect funding!

Another solution is a prenuptial agreement. These will usually be honored if there is full disclosure of all assets, and independent legal representation.

Naming someone other than your spouse as beneficiary of employer-sponsored retirement plans.

Suppose you are married and a participant in a 401(k), (or certain other employer-sponsored plans) and you name your children as beneficiary. Upon your death, the plan administrator will send the benefit to your spouse in spite of your instructions. Your children would be disinherited with respect to this asset.

Unlike the right to renounce, your retirement plan will definitely go to your spouse. The spousal right to renounce is just that—a right. Your spouse does not have to exercise it. If the deadline passes for filing, the estate will still go to your kids under the terms of your will. Not so with 401(k)s. It is the duty of the plan administrator to send the check to the surviving spouse.

In fact the plan administrator must distribute to the spouse in spite of all of the following:

  • You provided for your spouse in other ways, like as a beneficiary of your living trust or of your life insurance policy.
  • You are in a second marriage.
  • You have a prenuptial agreement in which your spouse waives any rights to your 401(k) plan.

Solutions: One solution is to obtain a qualified spousal waiver. A waiver in a prenuptial agreement not effective because the waiver must be signed after the marriage. Since a prenuptial agreement is by its very nature signed before the marriage, it is ineffective.

In addition, there are other requirements for a qualified spousal waiver such as the waiver must be irrevocable. Do not try this at home. Obtain qualified legal advice. (Do not rely on the pre-printed forms provided by the plan administrator.)

The better solution is to rollover the employer-sponsored plan to an IRA. IRAs do not restrict who you can name as beneficiary. No waiver is required.

Most plans don’t allow you to rollover to an IRA if you are still working.  In that case check to see if the plan allows for “in-service” withdrawals. If so, you may be able to rollover the plan balance to an IRA while still working for the plan sponsor.

 

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