You built the house in El Dorado Hills. You raised the kids, or helped raise the second set. The retirement accounts grew while you were busy with work, the mortgage, and everything else that comes with a life here. At some point, you filled out a beneficiary form and moved on.
That form is still out there doing exactly what you told it to do years ago.
Your living trust does not control your IRA or your 401(k). The beneficiary form on file with the financial institution does. In El Dorado Hills, where plenty of families have six and seven-figure retirement accounts sitting next to a $900,000 to $1.5 million home, one outdated form can quietly hand the money to the wrong person.
Here is what actually happens when those forms are wrong, the four mistakes we still see every month.
Retirement accounts pass by contract, not through your trust. The financial institution looks at the beneficiary form on file and pays whoever is named. Your living trust, your will, the handwritten note in the desk drawer, none of that matters.
This is the one that costs families the most money and causes the most damage. The wrinkle is that California law and federal law treat IRAs and 401(k)s very differently after a divorce, and most people do not know which rules apply to which account.
For an IRA (traditional or Roth): California Probate Code section 5040 generally treats your ex-spouse as if they predeceased you when the divorce becomes final. The custodian should not pay the ex-spouse on the IRA. There are exceptions, including a court order requiring the ex-spouse stay on the account or clear evidence the account owner intended to keep them named, but the default rule under California law is revocation. Custodians like Fidelity and Vanguard often want to see the divorce judgment before they act on it. Other heirs can challenge an improper payment in probate court.
For a 401(k) or other employer plan governed by ERISA: federal law preempts California Probate Code 5040. The plan administrator follows the beneficiary form on file, period. The U.S. Supreme Court settled this in Egelhoff and Kennedy. Even if your divorce judgment divides the account through a QDRO, the death beneficiary is a separate question. A QDRO, short for Qualified Domestic Relations Order, is the court order family law attorneys use to split a 401(k) or pension between spouses during a divorce.
But a QDRO does not, by itself, remove an ex-spouse from the death beneficiary line. Only updating the form does that.
We have seen six-figure 401(k) balances paid to an ex-spouse who had not spoken to the participant in fifteen years. The plan administrator did not care about the second marriage or the kids from that second marriage. They just followed the beneficiary form.
You need to review and if needed, update every IRA, every 401(k), every 403(b), every old rollover account from a job you left a decade ago. Update primary and contingent beneficiaries. Then update them again every two or three years and after any life event.
Some people think this is the safe play. Let the estate handle it. It is not safe. Naming your estate as the beneficiary sends the account through California probate: big probate attorney fees, twelve to eighteen months under court supervision, and family and asset information become part of the public court file.
Your eight-year-old cannot take legal title to a $400,000 IRA. The court will appoint a guardian of the estate, the guardian will file annual reports, the money will sit in a restricted account, and at age 18 the child can spend all of it on DraftKings and a G-Wagon. Most parents in El Dorado Hills don’t want their 18 year-old in charge of a big retirement plan. With minor children, it’s better to name your living trust as the beneficiary.
For a child with special needs, a direct beneficiary designation can do something even worse. The account balance counts as a resource and can disqualify the child from Medi-Cal or SSI. A special needs trust, named as beneficiary, holds the funds for the child's benefit without blowing up eligibility.
If you have minor children or a child with special needs, your living trust should include provisions to create trusts for them when you die. These sub-trusts or “for the benefit of trusts” (FBO trusts) should be named as the beneficiary for the child on your beneficiary form.
Primary beneficiary dies first. If there is no named contingent beneficiary, the account falls back to the estate, and you are back in probate. A two-second oversight on a form. A six-figure consequence.
Even with a perfect beneficiary setup, the SECURE Act ten-year rule is going to land on your kids. Most non-spouse beneficiaries now have to empty an inherited traditional IRA or 401(k) within ten years of your death. Every dollar that comes out is ordinary income, stacked on whatever they're already earning, and your kids are most likely to inherit in their forties or fifties, in their peak earning years.
There's no fix for the SECURE Act's 10-year rule on inherited retirement plans. But you may be able to soften the blow through income tax planning: Roth conversions in lower-income years, charitable strategies, drawdowns timed to your own bracket rather than your kids'. Worth a conversation with your CPA and financial advisor.
ERISA requires written spousal consent before you can name anyone other than your current spouse as the primary beneficiary on a 401(k). IRAs do not have that federal requirement, although some custodians impose their own. If you are married and you want to name a trust or your kids as the primary beneficiary on a 401(k), your spouse has to sign off. We handle that as part of the planning process.
You do not have to name your trust on every retirement account. Sometimes that creates its own complications. What you do have to do is make a deliberate decision for each account, in coordination with the rest of the plan.
For most El Dorado Hills families, the cleanest setup looks like this. Primary beneficiary is the surviving spouse, with rollover rights. Contingent beneficiary is the living trust, so the trustee can follow the age-based or needs-based instructions you actually wrote. In second-marriage situations, sometimes the trust gets named as primary so the document can balance the new spouse and the children from a prior marriage.
The detail that makes this work is the trust language. The trust has to qualify as a see-through trust under IRS rules to preserve the favorable distribution treatment for non-spouse beneficiaries. Off-the-shelf trust forms often do not. We draft for it specifically.
Identify the beneficiaries of each of your retirement plans. The 401(k) from your current job. The rollover IRA from the job before that. The Roth. The 403(b) from your years at the school district. The old plan from a job you left in 2018 that is still sitting somewhere. Log into each portal or call the plan administrator and confirm the primary and contingent beneficiaries on file. Write them down on one page.
Do the same for life insurance and any payable-on-death bank or brokerage accounts. The same rules apply, although life insurance is specifically excluded from California Probate Code 5040, so an ex-spouse on a life insurance policy stays on it until you remove them yourself.
Clark Allison has been handling California estate planning for nearly thirty years. Our main office is right here in El Dorado Hills on Windplay Drive. Estate planning and trust administration is the only thing we do. We do not litigate, we don’t do divorces, criminal law, or real estate deals. We only do estate planning and trust administration.
And we do not hand the work to a paralegal after the first meeting. You work directly with one of our attorneys from the first call through the final signing. Most clients complete their estate plans in about two weeks. We can meet you in our El Dorado Hills office or handle the entire process by Zoom from your kitchen, which is how we serve clients throughout California. Once you are a client, follow-up questions are free, forever.
Our flat fee for most families is $3,000 single or $4,000 married. You'll know the price before you start. No hourly billing, no surprise invoices for every phone call.
Generally yes. California Probate Code section 5040 treats your ex-spouse as if they predeceased you on most non-probate transfers, including IRAs, once the divorce is final. There are exceptions, including a court order or clear and convincing evidence of contrary intent. Your retirement plan custodian may want to see the divorce judgment before acting on it. The safest move is still to update the form yourself.
No. ERISA, the federal law that governs most employer retirement plans, preempts state revocation statutes. Your 401(k) plan administrator will follow the beneficiary form on file, even if you are divorced. If you never updated the form, your ex-spouse usually gets the money. Update the form.
If you are currently married, yes. ERISA requires written spousal consent to name anyone other than your current spouse as primary beneficiary of a 401(k). IRAs have no federal consent rule, although some custodians impose their own.
Sometimes yes, sometimes no. It depends on the trust language, the size of the account, the ages of the beneficiaries, and the family structure. The trust has to qualify as a see-through trust under IRS rules to preserve the favorable distribution treatment for non-spouse beneficiaries.
Every two to three years, and after any major life event. Marriage, divorce, the birth of a child or grandchild, the death of someone named on a form, a new job with a new 401(k), the rollover of an old plan. It will save your family from a problem they did not see coming.
We put together a one-page reference guide that outlines how to title your assets and how to name your life insurance and retirement plan beneficiaries. You can download it here: Download: How to Fund Your Living Trust
Related reading:
Call us at (916) 983-9410 or CLICK HERE to schedule a free intro call.
We serve El Dorado Hills clients from our El Dorado Hills office. We also work with clients from our Roseville, San Luis Obispo, and San Diego offices, and virtually from anywhere in California.