I also signed a waiver giving up my right to the 401(k), but he died before submitting it to his employer. Now the employer will only release the money to me, and my children's trustee wants me to give it to them per the instructions in the will. Won't this incur a huge tax liability? The account is worth about $150,000. --KA via email
A: You have a real mess on your hands!
You're right that if you receive the 401(k) account as its beneficiary, and then pay it to the children's trust, the money will be a taxable distribution.
As the beneficiary who is taking that distribution, you'll owe the tax. In other words, if you give the account to the trust, you'll be on the hook for a big tax without the means to pay it.
But if you withhold enough money to pay the taxes, the trustee will have a legitimate complaint that the kids are being short-changed.
Let's quickly fill in the legal background for everyone else:
Your husband clearly decided to leave most of his money in trust for the children. But he couldn't leave them his 401(k) account without your consent, because by federal law, your spouse is entitled to be your 401(k) beneficiary. You signed a waiver so that your husband could name the trust for the kids as his beneficiary -- and that waiver should have been filed with the 401(k) plan's administrator.
You also signed a statement that's attached to his will, relinquishing your right to the 401(k) plan -- but the will isn't the governing document here.
The 401(k) plan administrator is bound by the federal law and the plan's rules. He can't pay the account to anyone but the surviving spouse unless he has received a signed waiver and a new beneficiary designation from the account owner; the plan's rules probably say that those documents must be delivered during the account owner's lifetime.
Some readers may be wondering, As the beneficiary, couldn't she disclaim the 401(k) account? Then it would automatically go to the contingent beneficiaries, who presumably are the kids?
A good question. Unfortunately, that escape route is now closed, even if your husband completed the 401(k) paperwork naming the children or their trust as contingent beneficiaries. One can only disclaim an inheritance within nine months of the decedent's death. He died last November -- eleven months ago.
You're fortunate in one respect: You're not facing a December 31 deadline to take a minimum required distribution from this account. None are required this year. And even if there were minimum distributions for 2009, as a surviving spouse you wouldn't have to take one from the account until the year your husband would have turned 70 and a half, says Barry C. Picker, a Brooklyn New York tax accountant and IRA expert. **
Okay -- so what should you do?
First, you and the children's trustee should make sure that the 401(k) plan administrator has received copies of your signed waiver, the new beneficiary designation and any other relevant documents, and has been fully briefed on the situation, says Stephen J. Silverberg, an East Meadow NY estate lawyer. ("It's unclear how soon your husband died after you signed the waiver," he adds, "but you have a better argument if he died just a couple of days later than if he held onto the waiver for ten months without submitting it to the plan.")
If the plan administrator has everything and still rejects your joint request to treat the trust as the beneficiary, you should appeal his decision, using the appeals procedure detailed in the 401(k) plan. "The entire appeals procedure is laid out in the summary plan description," says Silverberg. Get a copy right away, if you don't already have one.
If the waiver and new beneficiary designation were properly signed and notarized, and you and the children's trustee join in making this appeal, Silverberg says, the administrator should be willing to pay the account to the trust as beneficiary.
"After all," he points out, "you're the only person who could sue the 401(k) plan for paying the trust, and you're affirming that you signed the waiver and this is what you want."
** This post originally incorrectly said that a required minimum distribution would have to be filed by December 31 this year.
Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are only addressed online.