Retirement Beneficiary Designations — 10/24/08

Jeff: Most people want to leave everything to their spouse when they die. But if you don't want to do this, if you'd rather leave assets to your kids or to a boyfriend or girlfriend, are you allowed? You might be surprised to learn the answer. Here to discuss these issues is attorney Michael Solomon.

Jeff: I have a retirement plan. Can't I name anyone I want as my beneficiary?

Mike: No. There are special rules for pension plans and 401k plans.

Rule#1—For 401k plans, profit sharing plans and most 403b plans, the law says you must leave your entire account to your spouse.

The only way you can name someone else, a child, a girlfriend, or maybe an estate planning trust is if your spouse signs a waiver of her rights and has the signature witnessed by the plan administrator or a notary public. If your spouse won't agree, there's nothing you can do.

Rule #2—For traditional IRAs or Roth IRAs, in Ohio, there are no restrictions on who can be the beneficiary or how you take the money out, but some states require the spouse to sign off if you don't make your spouse the beneficiary.

Rule#3—All monthly pension benefits must be paid out as a joint and survivor benefit between you and your spouse unless the spouse signs a waiver. A joint and survivor benefit means that the pension plan pays out benefits over the joint lives of the husband and wife. Since the benefit is paid out over two lives, the monthly check you get is much less than if the payments were only over your life.

Jeff: Why would the law force someone to take out smaller payments over both spouses' lives from their pension?

Mike: The purpose of this law is to make sure that your spouse doesn't lose everything on your death. The fear was that the husband would elect to have a higher monthly payout over his life and then if the husband dies the wife would have little or no pension benefit.

Jeff: Does your ex-spouse have any rights to your pension after a divorce?

Mike: This may shock a lot of people, but the answer can be yes.

In a recent decision by the US Court of Appeals, a married pension plan participant retired and under the law started receiving a joint and survivor benefit over the joint lives of him and his wife. This means, although he received a smaller month benefit, if he died his wife would still receive a monthly retirement benefit. Later he divorced his wife and remarried and wanted his new wife to get his remaining pension benefit when he died. The divorce court even made that part of the divorce decree. The US Court of Appeals held that once you retire you can't change your payout election, and his ex-wife, not his new wife, got the rest of his pension benefit.

Jeff: Is there anything you can do?

Mike: This is so complicated, dealing with retirement plans. The most important step to take is to sit down with your advisor before you make any decisions about your retirement options to make sure you make the right decisions for you and your family.

Jeff: Thank you.