401K to ex spouse disclaimed to children

Submitted by Sarah Walsh on Mon, 2014-11-10 22:37

My client is the ex spouse

Client’s ex spouse had her listed as the primary beneficiary on both his life insurance and 401k.
Ex spouse: Passed away at 56 (still employed)
Child #1: 21, not a full-time student but with some medical issues
Child #2: 16, still in high-school

She is going to keep the life insurance to cover the spousal maintenance that was ordered in their divorce. She is considering disclaiming the 401k money. It would then be paid to the contingent beneficiaries (the kids). However, she doesn’t want Child #1 to get the money until his medical issues are resolved. Child #2 cannot get the money at this point until age of majority and she would like it to be used for college.

What are her options?

Thank you



Submitted by Alan - IRA critic on Mon, 2014-11-10 23:12

State law will specify how the minor must receive the funds, but if that is through an UTMA account there still is no way to prevent unlimited access at the age of majority. The 21 year old would have unlimited access now, possibly a conservatorship could prevent that. Otherwise, specific limitations are best done by making a trust the beneficiary or contingent beneficiary with the conditions part of the trust. Once the owner passes, it is too late to apply new limitations in most cases. For the 21 year old, the extent of the medical issues are important. An attorney should be consulted for a more specific response.

Submitted by Sarah Walsh on Tue, 2014-11-11 16:42

Basically what I am reading is that as the ex spouse has already passed, and if she wants to maintain control, she needs to keep the money in her name.  Since she is not a spouse, she needs to put the IRA in her name as an inherited IRA.  Once it is in an inherited IRA, she can use her age 70 1/2 or 5 years.  However, once SHE passes, her beneficiaries would have to distribute in a lump sum.  Correct?

Submitted by Alan - IRA critic on Tue, 2014-11-11 17:43

  • As a non spouse beneficiary of a 401k where participant passed prior to the RBD, she has a choice of the 5 year rule or life expectancy in most plans. However, if she does a direct rollover to an inherited IRA by 12/31 of the year following the year the ex passed, she can use her own life expectancy even if the plan itself had a mandatory 5 year rule. If she misses this deadline, then she is stuck with what the 401k plan requires. If she does the transfer to an inherited IRA by the deadline she can use her Table I life expectancy for RMDs, and of course can take out any additional amounts she wants (possibly to gift to the children). That would provide her with control, but at the cost of higher tax rates than the children would pay, and she would be subject to the annual gift exclusion of 14k (plus direct education or medical bill payments). As a non spouse 401k beneficiary, she also has the option to transfer any portion to an inherited Roth IRA if she wishes. Once funds are in an inherited TIRA, they cannot be converted to an inherited Roth, so if she wants to roll any portion of the 401k to an inherited Roth, that must be done before the IRA transfer and after and RMD for the year is completed.
  • You referred to age 70.5, but that age does not apply to a non spouse beneficiary.
  • If she transfers to an inherited TIRA or inherited Roth IRA and names the children as successor beneficiaries, after inheriting they would have to complete the RMD divisor schedule the client was using. But if they inherit the 401k as successor beneficiaries, they may have to take a lump sum distribution.
  • There is never an early withdrawal penalty because all possible accounts are inherited.
  • If ex’s plan includes highly appreciated employer shares, the feasibility of NUA should be explored.

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