I want to name my child from a previous marriage (age 15) the beneficiary of my 401(k) rather than my current spouse. Does this pose any problems?
First, defined benefit plans, such as your 401(k), require spousal consent to change the beneficiary per ERISA rules, meaning your spouse would have to sign off on the change. That said, ERISA also governs how plans are passed to beneficiaries, which means the beneficiary designation trumps any direction left in your will. If your child inherits your assets in a trust, and is named beneficiary of the 401(k), those 401(k) assets will go directly to the child and bypass the trust. Essentially, if you were to die, the assets would be converted to an inherited IRA and the beneficiary would have to take distributions based on their life expectancy. While a minor, the child’s guardian would likely handle the distributions. However once that child reaches the age of majority, he or she could empty the account and spend the money as he or she wishes. The unfortunate truth is most 18-year-olds are not that responsible with money.
You would be better served naming a trust as the beneficiary, and naming your child the beneficiary of the trust. That way you could dictate from beyond the grave, when your child would have full access to the funds.
At Henssler Financial we believe you should Live Ready, and that includes understanding how your assets are transferred after your death. If you have questions: