Could your former spouse inherit your 401(k)?

It’s a good news/bad news situation. The bad news is that yes, after a divorce, your former spouse could inherit your 401(k). The good news is that you can prevent it from ever happening.

For most people, there’s some sense of relief when a divorce becomes final. They’re ready to begin a new life without all of the old spousal disagreements and problems.

Some people think their work is done at that point when the divorce decree is issued. Unfortunately, they still have some work to do in order to make sure that they don’t allow their ex to inherit from them retirement savings or other assets.

Forbes.com columnist Jeff Landers mentions in a recent piece an anecdote about how the contents of a deceased man’s retirement account went to his new wife, though he had named his children as beneficiaries.

Here’s what happened: the man’s first wife died, at which point he changed the beneficiaries on the retirement savings to his kids.

Then he remarried. But he didn’t get a spousal waiver for his 401(k); a requirement if you want to leave those ERISA (Employee Retirement Income Security Act) regulated funds to someone other than a spouse.

When the man died, his children and his wife both thought they were entitled to the retirement savings. But a U.S. District court ruled that the wife’s right to the funds had been vested as soon as she said, “I do.”

Here’s the kicker: she hadn’t been named as a beneficiary and the couple had only been married for a month and a half. Yet the children were locked out simply because their father failed to file the necessary form.

Landers urges people who have retirement accounts, wills and similar legal protections of their wealth to talk to a financial advisor before and after a divorce so that your assets go where you want them to go.

Source: Forbes.com: “Don’t Let Your Ex-Husband Inherit Your 401(k)” by Jeff Landers: July 27, 2011