Review and Update the Beneficiary Designations of Each of Your Retirement Accounts

Dear Len & Rosie,

My husband’s mom passed away recently and the only asset she owned was a 401k. Unfortunately, she did not name a beneficiary on the 401k. She does have a Last Will and Testament that leaves everything to her husband, but she divorced her husband after she made the will.

The 401k came from her husband when they got divorced.  Is there anyway that he’ll get the money?  My mother-in-law racked up a lot of medical bills in the last year of her life, and we know it would be gone if it went to the estate.  The 401k has less than $30,000, so it's not a whole lot of money by any means. Thank you for your time and help!


Dear Krista,

If your mother-in-law had named her son, or anyone else for that matter, as her 401k beneficiary, then the retirement account would pass free to the beneficiary outside of probate, it wouldn’t have to be used to pay her medical bills, and her beneficiary could have rolled over the account into an Inherited IRA (sometimes called a Beneficiary IRA), allowing the beneficiary to stretch out IRA distributions over his or her life expectancy. That would have been nice.

Your husband could have had a modest retirement account that he could cash in as he pleases without penalty. He could have cashed it in all at once, or he could restrict payments to required minimum distributions based on his age. He would have to pay income tax on only the 401k distributions he takes each year, but since he can decide how much to take in excess of the required minimum distributions, your husband would have had the power to decide when to pay the income tax on the $30,000.

Instead, with no designated beneficiary, the 401k must pay into your mother-in-law’s probate estate, making it subject to not only income tax, but also to the claims of her creditors. If there’s anything left over after her creditors are paid off, the money should go to the persons named as beneficiaries of her will. Except for her husband. He was disinherited from her will by operation of law when the divorce was made final.

What can you do? Not much. The best you can probably do at this point is to ignore your mother-in-law’s creditors. If your husband the sole beneficiary he can collect the account outside of probate using a Small Estate Affidavit under California Probate Code section 13101, but this will make him personally liable for his mother’s debts up to the value of the account. If he keeps his mouth shut and ignores his mother’s creditors, the account may pass under the radar. Regretfully, we don’t have better news for you than that.

For the rest of you, this is a cautionary tale. All of you need to review and update the beneficiary designations of each of your retirement accounts, even if you think it was done right the first time. If you don’t, you could make a very expensive mistake for your family.

Len & Rosie