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!

Krista

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

You must fund your trust with your assets

Dear Len & Rosie,

My husband died three weeks ago. He had a trust of his own. If he has some accounts that are not in the trust, and have no beneficiary listed, who inherits those? He has two sons. I, his wife, am co-executor of his will and co-trustee of his trust with his oldest son.

Margot

Dear Margot,

Once your husband created his trust, his only real job after that was to fund his trust with his assets. Trusts avoid probate, but only for those assets that owned titled in the name of the trustee of the trust. If he left accounts in his name alone, outside the trust, and without any joint tenants or beneficiaries, then he didn’t finish the job. Now it’s up to you and your step-son to do it.

These non-trust assets will pass under the terms of your late husband’s will. Since he has a trust, it’s more likely than not that the will is a “pour-over will” that leaves the estate to the trust.

If the total value of the non-trust assets are worth less than $150,000, then there’s no probate necessary. The persons inheriting these accounts, the “successors in interest”, can collect the accounts directly, without probate, using small estate declarations under California Probate Code section 13101. You’ll have to wait 40 days or more after your husband’s date of death to do this, however, and there are other issues to consider, such as whether or not the trust requires a taxpayer identification number obtained from the IRS.

If the total value of the non-trust accounts in the probate estate is worth more than $150,000, then there are only two options. The first is probate. This is expensive and time consuming.

The alternative to probate is to petition the court seeking an order declaring that these assets are really owned by the trust, no matter what the account statements say. There’s an appellate court decision in California, called “Estate of Heggstad”, that basically stands for the proposition that if your husband’s trust document includes a list of trust assets, then the trust document itself may be a valid assignment of assets to the trust, despite your husband never having gone to his banker and broker to retitle his accounts into the name of the trust.

There’s also another appellate decision in a case named “Heaps vs. Heaps” that can be used to drag into a trust non-trust assets that were purchased with trust property. A good example of this is if your husband sold a home held within his trust and put the money into a brokerage account titled in his name alone.

These techniques don’t work in every case. Our point is that you don’t necessarily have to file for probate if a trust isn’t funded properly. You and your step-son should gather your husband’s account statements, deeds and stock certificates, together with his trust and other estate planning documents, and review everything with a trusts and estates attorney.


Len & Rosie