Your Payable on Death Designation May Surprise You – Part 2

In my blog last week I began talking about payable on death designations.  Wife died and 10 days later Husband died.  Neither spouse had left a will but Wife had designated Husband as her primary beneficiary of her 401k.  She did not designate any alternate beneficiaries.  

In the process of liquidating Wife’s 401k, we were required to complete a beneficiary affidavit.  The form stated that if the claimant is the spouse no further information about any other family members is necessary so we sent it back leaving blank the questions about children parents and siblings.  The financial institution, however, sent us back the form stating it was incomplete.

When I called the institution to clarify what was incomplete, things got interesting.  They explained that they needed me to provide this information about family members of the Husband and not the Wife.  I explained that since Husband outlived Wife, the account proceeds should then become part of his estate to be distributed by the Administrator of his estate.  Husband had no children or siblings and his parents had passed away many years before so in the end, in our case, the outcome was what I believe it should have been anyway – payable to Husband’s estate.

But, what they told me still didn’t make sense and the outcome could have been very different if Husband had other close family members.  So I probed a bit further.  I asked what would have happened if Husband had died before Wife.  Shouldn’t the account then have gone to Wife’s children, then parents, then siblings?  They told me no.  

And, what if Husband and Wife each had children from a previous marriage or relationship?  Were they saying that Wife’s stepchildren would have been entitled to the account if Husband had predeceased Wife?  The person I spoke with insisted that this is what would have happened.  Wife’s stepchildren would have received the account proceeds over Wife’s children or parents or siblings even if she never specifically named them as beneficiaries.

Now, I have to admit that this was not our fact pattern so I didn’t need to push them on it, which I surely would have if it mattered.  It just didn’t sound right.  On the other hand, I also do know that the plan sponsors of 401k and other “tax qualified” accounts determine the order of succession to an account when the beneficiary designation isn’t clear.

What this particular case showed, however, is that there can be unintended consequences and outcomes if we don’t fully understand the beneficiary designations we make and which may be applied by default to our retirement accounts.