Dear Len & Rosie,
My husbandís mom passed away recently and the only asset she owned was a 401k. Unfortunately, she did not name a beneficiary on the 401k. She does have a Last Will and Testament that leaves everything to her husband, but she divorced her husband after she made the will.
The 401k came from her husband when they got divorced. Is there anyway that heíll get the money? My mother-in-law racked up a lot of medical bills in the last year of her life, and we know it would be gone if it went to the estate. The 401k has less than $30,000, so itís not a whole lot of money by any means. Thank you for your time and help!
If your mother-in-law had named her son, or anyone else for that matter, as her 401k beneficiary, then the retirement account would pass free to the beneficiary outside of probate, it wouldnít have to be used to pay her medical bills, and her beneficiary could have rolled over the account into an Inherited IRA (sometimes called a Beneficiary IRA), allowing the beneficiary to stretch out IRA distributions over his or her life expectancy. That would have been nice.
Your husband could have had a modest retirement account that he could cash in as he pleased without penalty. He could have cashed it in all at once, or he could restrict payments to required minimum distributions based on his age. He would have to pay income tax on only the 401k distributions he takes each year, but since he can decide how much to take in excess of the required minimum distributions, your husband would have had the power to decide when to pay the income tax on the $30,000.
Instead, with no designated beneficiary, the 401k must pay into your mother-in-lawís probate estate, making it subject to not only income tax, but also to the claims of her creditors. If thereís anything left over after her creditors are paid off, the money should go to the persons named as beneficiaries of her will. Except for her ex-husband. He was disinherited from her will by operation of law when the divorce was made final.
What can you do? Not much. The best you can probably do at this point is to ignore your mother-in-lawís creditors. If your husband is the sole beneficiary he can collect the account outside of probate using a Small Estate Affidavit under California Probate Code section 13101, but this will make him personally liable for his motherís debts up to the value of the account. If he keeps his mouth shut and ignores his motherís creditors, the account may pass under the radar. Regretfully, we donít have better news for you than that.
For the rest of you, this is a cautionary tale. All of you need to review and update the beneficiary designations of each of your retirement accounts, even if you think it was done right the first time. If you donít, you could make a very expensive mistake for your family.
Len & Rosie
Dear Len & Rosie,
I have a sister who is a drug addict and is usually out of contact with us. My other sister and my stepbrother and I are the beneficiaries of my stepfatherís living trust. Is there anything I can do ahead of time to ensure that we donít have to find her when my stepfather dies?
When an ordinary revocable trust becomes irrevocable upon the deaths of the settlors (the persons creating the trust), then the trustee is required to provide notice of the existence of the trust to certain persons, including all of the beneficiaries, other trustees, and the people who would inherit from the trust settlors had they died with no estate plan at all.
If your stepfather created the trust on his own, presumably after your motherís death, then you have nothing to worry about. Your sister, his stepdaughter, isnít entitled to any notice regarding the existence of the trust unless sheís named as a beneficiary.
If your stepfatherís trust was created by him and your mother, then your drug addicted sister is entitled to notice of the trust under California Probate Code section 16061.7. If you know where she resides, then the trusteeís attorney can mail the notice to her after it is signed by the trustee, with a cover letter explaining that sheís not entitled to anything. If she cannot be located after a diligent search, then thatís OK too. The trustee does not have to send the notice if your sister cannot be located.
Alternatively, it may be possible for your stepfather to revoke the trust he created with your mother, and transfer everything to a trust he creates for which your sister will not be entitled to notice.
Itís difficult to deal with a drug addicted loved one in an estate plan. Frequently, it does more harm than good to leave a substantial sum of money to someone suffering from an addiction. There are generally two ways of dealing with this challenge. The easiest way is to disinherit the drug addicted child, but that can be harsh.
An alternative would be to leave an inheritance to the drug addicted beneficiary within a discretionary trust in which the trustee has the absolute right to withhold most distributions unless the beneficiary passes a drug screening test. The trust would be there to pay for drug rehabilitation, but not the drugs themselves. The problem with this alternative is that the person serving as trustee becomes his brother or sisterís keeper. The trustee is the person who has to say no to the drug-addled demands of a suffering beneficiary.
Thatís why many families take the easy way out by disinheriting the drug addicted child, leaving everything to the other children, and rely on a legally unenforceable handshake promise from the family to help out the drug addicted child when itís appropriate.
Len & Rosie