401(k) Beneficiaries

Dear Liza: My wife and each have two children from prior marriages. One of her children is a homeless alcoholic who has no desire to become sober.  I wish to prevent the 401k money from going into my wife’s estate which would have only her two children as default beneficiaries. This would allow the irresponsible child to inherit half of the estate. I want the to have the final beneficiaries to be the 3 responsible children. Can I do that?  401(k) plans are regulated under federal law.  You must name your spouse as your primary beneficiary, unless she signs an effective waiver.  (But if she needs that money to live on after your death, she probably would not agree to waiving her rights in that way.)  You could name a trust as your secondary beneficiary, and,  the three ‘responsible’ children could be the beneficiaries of that trust, but, if you do that, you are going to limit their ability to withdraw that money in a tax-efficient way. They will have to use the age of the oldest trust beneficiary to determine how much money they have to withdraw each year: which means that the younger ones will have to take money out more quickly (and pay more tax) than they otherwise would.  And, if your spouse survives you, she will be able to roll that 401K into her own IRA, and then name whichever beneficiaries she chooses.   But she doesn’t have to name both of her children as her beneficiaries.  She can structure her estate in a way that makes sense for both of her children.  She could, for example, name only her responsible child as the beneficiary of her IRA, or she could leave the share for her troubled child in trust for his or her benefit via a living trust or a Will.