Does a 401(k) Get Passed On to Children?

If you still have a balance in your 401(k) account at your death, the funds go to your designated beneficiary. In many cases, children inherit a parent’s 401(k) plan, but it’s not an automatic inheritance simply because they are the children of the plan holder. If children are not specifically designated as beneficiaries of a 401(k), the funds pass instead to the named beneficiary. And if the surviving spouse did not give written consent to relinquishing claim to the funds, even children who are designated as beneficiaries may not actually receive the funds.

TL;DR (Too Long; Didn't Read)

Children inherit 401(k) funds only if you designate them as beneficiaries and, depending on the terms of your plan, if your spouse gives written consent to relinquish the funds to them.

Types of 401(k) Beneficiaries

Commonly, the beneficiaries of 401(k) accounts are the plan holder’s family members, particularly the surviving spouse, even though the account owner may designate anyone to inherit the account such as a charitable organization. If you have a 401(k) plan, you can also designate multiple beneficiaries to inherit the funds with the assets divided any way you wish.

For example, as sole beneficiary, your spouse receives 100 percent of the plan proceeds at your death. But you can also split the proceeds between your spouse and your two children so that your spouse, for example, receives 50 percent of the funds and each child splits the remaining 50 percent (25 percent per child). And if you're not married, you can pass on the full amount of your 401(k) to your children.

If you have multiple beneficiaries, and one of them predeceases you, your plan assets are divided among the surviving beneficiaries. In the case of all beneficiaries predeceasing you, you can name contingent beneficiaries who will subsequently inherit your 401(k) assets.

401(k) Spousal Consent Form

If you want to pass on your 401(k) to a child, or to multiple children, many plan providers require the plan holder’s spouse to submit a spousal consent form. This form, which your spouse must sign, confirms that you have named your children as your beneficiaries instead of your spouse. By signing this form, your spouse consents to your choice. If you’re married, and you’re thinking about leaving your 401(k) to your children, check with your plan provider to find out if the spousal consent form is a required part of naming beneficiaries other than your spouse.

Estate Probate and 401(k) Funds

If you’ve properly designated your 401(k) beneficiaries, they typically will not have to wait until your estate is probated to receive the funds in your account. If your named beneficiary predeceases you, you failed to designate a new beneficiary and you had no contingent beneficiaries, the funds in your 401(k) account become part of your estate.

This can tie the hands of your children if, for example, you only named your spouse as a beneficiary without also including your children as contingent beneficiaries. Instead of receiving your 401(k) funds immediately after your death, your children will then have to wait to receive the funds until after your estate goes through probate, which is often a lengthy process.

Establishing a 401(k) Trust for Children

If your children are still young, you may decide to set up your 401(k) plan as a trust for them. By naming a trust to manage your 401(k), you can establish your children as beneficiaries of the trust. Because this maneuver must be properly and legally executed, you may want to consult your financial planner for advice on how to set up a trust for your children to inherit your 401(k).

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