Your Will Is Not the Boss of Your 401(k)

A man in Indiana County dies with a will that could not be clearer. Everything splits evenly between his two children. His daughter takes the will to a lawyer, feels good about how simple it all looks, and then calls the retirement plan administrator. The 401(k), the largest single asset he owned, is going to his first wife. He divorced her in 1997. He never touched the beneficiary form. The will does not get a vote.

The Form Nobody Remembers Signing

Here is the part most people never hear. A will only controls the assets that pass through probate, and a large share of what the average Pennsylvanian owns never goes near probate. Life insurance, 401(k) accounts, IRAs, annuities, and bank accounts marked payable on death all pass by contract, straight to whoever is named on the form. That form was probably filled out on your first day at a job you no longer have, buried in a stack of paperwork you skimmed. It outranks the will you paid a lawyer to draft.

Pennsylvania Patched Part of the Problem

The Legislature saw at least one version of this coming. Under 20 Pa.C.S. § 6111.2, when a marriage ends in divorce, a designation naming the former spouse as beneficiary of a life insurance policy, annuity, or similar contract generally becomes ineffective, and the law treats the ex-spouse as though he or she died first. It is a sensible default. Very few people who go through a divorce intend to leave an ex a windfall.

Where the Patch Runs Out

Now the catch. Employer retirement plans governed by ERISA, the federal law covering most 401(k) and pension plans, follow federal rules, and federal law overrides the Pennsylvania statute here. The plan pays the person named on the form. Federal law also generally requires a married worker's 401(k) to go to the spouse unless the spouse signs a written waiver, which catches people who assumed they could simply name a child instead. Neither outcome cares what your will says.

Divorce is only the loudest example. Deaths, remarriages, new grandchildren, a beneficiary who develops a disability and would lose public benefits from a lump sum. Every one of those changes the right answer on a form nobody reminds you to update. And skipping probate does not mean skipping tax. Pennsylvania inheritance tax still reaches most of these transfers, although life insurance paid on the decedent's own life is exempt.

What to Actually Do About It

• Request a current beneficiary statement for every life insurance policy, retirement account, annuity, and payable on death account you own. Do not rely on memory.

• Name a contingent beneficiary, not just a primary one. If your primary beneficiary dies first and there is no backup, the money can land in probate anyway, which is the outcome you were trying to avoid.

• Think hard before naming a minor child directly. Insurers and plan administrators will not hand money to a child, and the family may end up in court having a guardian appointed to receive it.

• Tell your estate planning attorney what the forms actually say. A plan works when the will and the beneficiary designations are pointed in the same direction.

A will and a beneficiary form are supposed to work as a set. When they disagree, the form usually wins, and the family finds out at the worst possible moment. If it has been more than a few years since you looked at yours, that is a short conversation worth having. Ludwig, Everett & Tomb helps families across Indiana County build estate plans that hold together, forms and all. Call us at (724) 349-3908.