You Could Accidentally Disinherit Your Children Unless You Follow This Obscure Rule

True story: A father with three kids put them down as the beneficiaries of his nearly $250,000 401(k) account – but when he died, they got nothing. It’s all because of ERISA. Never heard of it? Neither had he.

A mom and daughter talk on a couch.
(Image credit: Getty Images)

If you’re widowed or divorced and have named your children as the beneficiaries of your company retirement plan, you could be putting them at risk of being disinherited if you remarry.

Due to a little-known ERISA rule, if your new spouse outlives you, they will receive your company plan funds, rather than your children — even if you have put your children down as your named beneficiaries.

While the purpose of the Employee Retirement Income Security Act of 1974 (ERISA) is to stop one member of a married couple from giving survivor benefits to someone else that should rightfully go to the surviving spouse, in some scenarios this law can lead to abuse.

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The Sad Story of Leonard Kidder

For example, Leonard Kidder named his wife of over 40 years, Betty Kidder, as the beneficiary on his 401(k) plan, but after she died, he made some changes on his beneficiary form, naming his three adult kids as the new beneficiaries.

In 2008 Mr. Kidder decided to get remarried to a woman named Beth Bennett. Just six weeks later, he died … and an ugly dispute between the children and the new wife ensued. As the listed beneficiaries, the children expected to receive their father’s 401(k) assets, which totaled nearly $250,000. But the new Mrs. Kidder insisted that as the wife, she should be entitled to them.

After a legal battle between the children and Beth Bennett Kidder, the courts awarded the 401(k) assets to Mrs. Kidder, even though the three children had been named as the beneficiaries.

ERISA: A Rule with Good Intentions, but Bad Results

The late Mr. Kidder was apparently unaware of the federal law that requires qualified plans, including 401(k)s, to give surviving spouses like Beth Bennett Kidder the right to inherit all the money in the account — unless she signed a spousal waiver giving up her rights and allowing the other spouse to name a different beneficiary. The institution that administers the company plan will usually provide the spousal waiver form. But during their six short weeks of marriage, Leonard Kidder made no such waiver of spousal rights for his 401(k) assets.

A critical thing to remember is that the spouse giving up the benefits must have signed the waiver while the couple was married. So, if he or she signed a prenuptial agreement before the marriage, giving up their rights to the company plan, it won’t serve as a valid waiver.

How to Avoid This Problem (Hint: Careful with Prenups)

So, what are some strategies to make sure this never happens to you? While a prenuptial agreement cannot waive spousal rights to receive the company plan, it can include a provision stating that as soon as the fiancé becomes a spouse he or she will sign a valid spousal waiver. And it may be wise to include some considerations for keeping that promise in the prenup agreement as well: Spell out remedies or penalties if the new spouse won’t sign the spousal waiver as agreed.

For example, the prenup may state that the new spouse will have the right to remain in the home owned by the other spouse for the rest of his or her life, or perhaps receive a certain amount of retirement income from the other spouse’s trust after their death — as long as they sign the spousal waiver.

Also keep in mind, if you’re in a position to roll your company plan over to an IRA before the marriage takes place, this will solve the problem, since IRAs are not subject to this ERISA rule, and you can safely name anybody as your beneficiary that you wish.

Even after marriage if you are in a position to roll your plan over to an IRA, many (but not all) company plan administrators will not require the other spouse’s permission for you to do so, and once it’s moved to the IRA, you will not be subject to this ERISA rule.

Going into a second marriage later in life presents its own set of challenges, including making sure your company plan assets get to the people you intend them for. A little planning before you tie the knot can help you avoid a lot of resentment and stress later.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Mike Piershale, ChFC
President, Piershale Financial Group
Mike Piershale, ChFC, is president of Piershale Financial Group in Barrington, Illinois. He works directly with clients on retirement and estate planning, portfolio management and insurance needs.