Lynn Brenner's Family Finance

Can a 401(k) Beneficiary Disclaim the Account She Inherited?

Q: I have been searching for an answer to a unique question. X died leaving a sizeable 401(k). He and his former spouse had signed an earlier separation agreement forfeiting any right in the other's 401(k) accounts. However, X didn't change the beneficiary designation with his 401(k) trustee.

The spouse of X is willing to give up the money in X's 401(k) but the company says that they have to pay it to the spouse. Would a renunciation work in this case? --KB via email

 

A: X's wife can probably disclaim (or renounce) this inheritance if he died less than nine months ago -- although her ability to do so may depend on the rules of the 401(k) plan**; but a disclaimer won't solve the problem unless X remembered to name his chosen heir as a contingent beneficiary on the 401(k) account, or at least to name that person in his will.

The real problem here is that X didn't file the necessary paperwork with his 401(k) plan administrator. This seemingly innocuous omission can lead to disaster for your survivors. (See my earlier post 'An Estate Planning Nightmare: Death, Taxes, and a Missing 401(k) Waiver').

A named beneficiary (or an heir named in a will) always has the option to disclaim an inheritance within 9 months of the decedent's death.

When the primary beneficiary disclaims the money, the 401(k) account automatically goes to the contingent beneficiary.

If there is no contingent beneficiary on the account, the money would be paid into X's estate. Your estate is always the default beneficiary on a retirement account if you neglected to name one.

If the 401(k) account is paid to X's estate, it will go to the heirs he named in his will.

And what if X left no will? In that case, his estate will be distributed according to his state's intestacy law. In most states, that means it will be divided between his surviving spouse and children. In other words, his separated-but-not-divorced wife is probably one of the intestate heirs.

I'm not sure whether an intestate heir can disclaim an inheritance. If she can, that might work out okay if X wanted the money to go to his children. But a disclaimer won't have the desired result if X wanted to leave the account to his second cousin, or to his new sweetheart. Intestacy laws have a strict pecking order; and they make no provision for your nearest and dearest who aren't also your blood relatives.

Even in the best case scenario, X's family will have to pay a lawyer to sort all this out. And if the heirs end up getting the 401(k) money through X's estate, it will be on less favorable tax terms than if they'd inherited as named beneficiaries on the account.

The bottom line: This is another telling example of why you should keep your 401(k) account beneficiary designations up to date!

 ** My original post didn't include this caveat. A 401(k) plan's rules can never be more liberal that what is permitted by law, but they can be, and sometimes are, more restrictive.

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

Keeping Track of Health Care Reform - a Scorecard Worth Checking Out

Take a look at this: a simple, easy-to-understand scorecard that grades the progress of health care reform so far.

This sweeping piece of legislation has been compared to Medicare and Social Security. (It's worth remembering that both those programs, which now are hugely popular, were intially reviled in the most hyperbolic terms -- The end of the American Way of Life!!! An attack on All That We Hold Dear!!! -- by a big chunk of the political establishment and many members of the public.)

Also like Medicare and Social Security, the health care reform law -- aka the Patient Protection Act -- will be implemented over a number of years, and probably undergo a lot of tweaking along the way.

For now, most Americans are very confused about what's in the law. This scorecard will probably tell you at least one thing you didn't know. It will also give you a good sense of the new law's scope, the hurdles it must overcome as it becomes a reality, and its early start in addressing them.

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

When Can I Get a Free Annual Copy of My Credit Score?

Q: When is the effective date that I'll be able to get a free annual copy of FICO score, the same way I can get a free credit report from each of the three reporting agencies once a year? --RE via email

 

A: There isn't one. There's no law requiring that consumers be provided with a free annual copy of their credit scores.

You're probably thinking of a provision in the new financial services reform law. It says that if a lender, a landlord, or a potential employer denies you a loan, refuses to rent you a house or apartment, or turns you down for a job because of your credit score, he must give you a free copy of the score he used in making that decision. But there's nothing in that law about providing a free credit score to everyone.

A little background information might be useful here. Many people don't know the difference between your credit report and your credit score.

Your credit report is your credit history. It shows when you first obtained credit, how often you've borrowed, whether you pay your bills on time, how many credit cards you have, how much credit you use out of your total available credit limit, etc. It's a history of your transactions with all the entities you've done business with -- merchants, lenders, utility companies -- as reported to three big credit agencies: Experian, TransUnion, and Equifax.

These agencies are required by law to provide you with a free copy of your credit report every year. You need to look at all three because your history may vary from one agency to another. To order your free annual credit reports, go to www.annualcreditreport.com, or telephone 877 322 8228.

It's important to check your credit report every year. If you see yourself listed as having credit cards or outstanding loans you never took out, it may be a red flag that someone has stolen your identity.

Less dramatically, but a lot more often, credit reports contain basic errors caused by the agencies' carelessness. For example, I once found I was listed as having two charge cards at a big department store. I only had one. The other card belonged to someone with the same last name who lived in my zip code. I got that corrected. Luckily for me, she paid her bills on time, so having her account listed as mine hadn't hurt my credit score.

And that brings us to your FICO credit score -- a three-digit number that ranges from 300 to 850.

Your FICO credit score is a distillation of everything in your credit reports. (If your credit report were a three page essay, your credit score would be a three character Tweet.) It's called a FICO score after its creator, Fair Isaac Corp.

Lenders no longer bother to read your credit reports. They judge you by those three digits, which supposedly show your ability to pay your bills on time -- i.e., how risky it is to lend you money. Lenders use it to determine your interest rates, and some insurers use it to set your premiums. The lower your three-digit score, the more you pay for a loan or an insurance policy, and the less attractive you are as a potential renter or employee.

Obviously, you need to look at the score that they're using to judge you. Unfortunately, you still have to buy it. You can do that at myfico.com for $15.95.

Beware of the 'free credit scores' offered online. They aren't really free: They automatically enroll you in a credit monitoring service. If you don't cancel that service within seven days, you can end up paying a $20 monthly fee.

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

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A Voter's Complaint

And now, for something completely off-topic...

Yesterday's primary election was the first in which New York voters used new machines. Many of you in other states have already experienced your own new voting machines, of course. New York is ten years late getting around to this.

The new voting machines differ from one state to another. But there's one common theme: nobody anywhere likes them.

I emailed a few family members and friends about our new system this morning ... and long story short, my email is now on the New York Times blog, here.  I thought some of you might get a kick out of it.

Next post, back to personal finance. (Meantime, if you have any comments about the voting machines in your state, don't hesitate to add them!)

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved