Discover 2 ways the law can nullify your estate plan—after you die

Discover 2 ways the law can nullify your estate plan—after you die

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, when it comes to your spouse the law does render ineffective certain instructions that exclude her. It is important to know what those are so you can plan around it.

One problem area pertains to wills, and the other to employer sponsored retirement plans such as 401(k)s and 403(b)s.

Problem area #1: 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 comes up most often 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.

In Illinois the surviving spouse can renounce even if he or she was provided for in other ways, such as beneficiary of a life insurance policy or as the surviving joint tenant of the home. The right to renounce applies only to the assets passing under the terms of your will.

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 your 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 in which the right to renounce is waived. Prenuptial agreements will usually be honored if there was full disclosure of all assets, and independent legal representation when the agreement was being negotiated.

Problem area #2: Naming someone other than your spouse as beneficiary of employer-sponsored retirement plans.

Suppose you are a participant in a 401(k) plan, (or similar 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 a will (above), your retirement plan will definitely go to your spouse. The spousal right to renounce a will 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, or as the surviving joint tenant of the home.
  • You are in a second marriage. The fact that your surviving spouse is not the mother of your children is irrelevant. The plan administrator must send the check to the surviving spouse.
  • 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. This must be strictly observed as to form. 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, if it is available, 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.  However, some plans do allow for “in-service” withdrawals. If so, you may be able to rollover the plan balance to an IRA before you have separated from service with your employer.

If you have any concerns you would like to address with our office please call us at 847-674-0200.

 

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