As the amount of money stashed in 401(k)s and individual retirement accounts has grown, more and more families are finding themselves locked in battles over who has rights to the assets.

Even with the many concerns over retirement accounts in America, it’s undeniable – IRAs and 401(k)s represent a lot of personal wealth for everyday Americans. That means retirement accounts are assets uniquely worthy of particular attention, to include when it comes to their role in your estate planning. Indeed, amongst households with at least $100,000 to invest, 60% of the household’s assets are in an IRA or 401(k).

So, how ought retirement accounts factor into your estate planning. Who will inherit them? The answer is not a simple as you may think. Truth be told, the problem with retirement accounts is the crazy quilt of laws governing their distributions, and moreover, different laws apply to 401(k)s and IRAs.

The inheritance of retirement accounts is a lively topic and none other than The Wall Street Journal has recently offered a piece on the issue. While I commend the full article to your reading file, let’s review a few of the highlights here.

With 401(k)s, the overarching rules are in place thanks to the federal Employee Retirement Income Security Act (ERISA). If you are married, the 401(k) automatically passes to your spouse and does so regardless whether your spouse is the designated beneficiary, unless your spouse waives his or her right to your 401(k). By the way, if you have a premarital agreement, your intended spouse cannot effectively waive rights in your 401(k) until you are actually married. Plan accordingly.

What if you have children from a former marriage and you want to include them as beneficiaries along with your new spouse? Consider “rolling” your 401(k) into an IRA and making the beneficiary designations per your wishes, even if your children are beneficiaries under your will and trust.

Teaching point: The beneficiary designations on file with the retirement plan administrator trump any contrary arrangements in your will and trust. In fact, the U.S. Supreme Court has ruled that, despite any state law to the contrary, your ex-spouse will inherit your 401(k), if he or she is the last designated beneficiary on file with the plan administrator.

IRAs are governed by state law and that, by and large, makes them more pliable. Without the inflexibility of the ERISA laws, when it comes to your IRA it’s all about the named beneficiary (unless there is a state law to the contrary). One thing remains consistent, however. The beneficiary on file with the plan administrator takes precedence over any provisions under your will and trust. Exceptions: Some state laws rule out the complete disinheritance of a spouse and some have laws automatically disinherit an ex-spouse as beneficiary, unless you’ve completed the extra paperwork to confirm your intent to include your ex-spouse as beneficiary.

Bottom line: Retirement accounts, whether 401(k)s or IRAs, are important assets for many Americans. Given the complex tangle of laws that control your options, it is essential that you consult with competent legal counsel and coordinate the distribution of your retirement accounts as part of your overall estate planning. Be sure to consult an estate planning attorney admitted in your state of residence, as state property laws may need to be evaluated, too.

Reference: The Wall Street Journal (September 7, 2011) “Family Feuds: The Battle Over Retirement Accounts”

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