At least once a month, a recently bereaved adult child calls John Joseph (J.J.) Conway, principal and founder at J.J. Conway Law in Royal Oak, Michigan, inquiring about how to obtain their deceased parent’s pension.
Unfortunately, he rarely has good news.
“Pensions are their own entities with their own written rules, much like contracts,” explains Conway, a specialist in the Employee Retirement Income Security Act. “Pensions are also expensive, and owing to strict federal funding requirements, can cut into a company’s balance sheet.”
For these reasons, children can rarely inherit a deceased parent’s pension.
But that’s not an absolute “no.” So, under what circumstances can you inherit a deceased parent’s pension — and what other retirement benefits might you be able to inherit?
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Inheriting your parent’s pension
The answer to the question of whether you can inherit your parent’s pension depends on which plan and which payout option your parents chose when they signed up to participate in the plan, says Matthew Koppelman, financial planner at Prudential in Bethesda, Maryland.
A “single-life” option is straightforward: monthly pension payments equal to a fraction of the employee’s highest or most recent annual salary begin when the person, referred to as the participant, retires and stop when he or she dies.
Employees who choose a “joint-life” option will receive pension benefits until they die, when the payouts transfer to their beneficiary — usually a spouse — who will then receive some or all of the benefits until they die.
A third option is a “period-certain” plan, which makes guaranteed payments to either the participant or a beneficiary but only for a certain number of years, Koppelman says.
So, why do some adult children assume they can inherit a parent’s pension, when they usually can’t? Conway says the parent may have misunderstood the details of their retirement benefits.
“At retirement,” he says, “a parent may have completed several forms for such things as death benefits or retiree life insurance and listed their children as beneficiaries on non-pension-related documents.” And then, they could have shared this incorrect information with their children, leading them to assume they could inherit the pension.
Conway also believes that some adult children may be under this assumption because children can inherit some retirement benefits (more on this below). “However, pensions are different,” Conway says. “They have an entirely different set of rules and formulations, and by design, end at death.”
Children who believe that they are entitled to a pension can be persistent in searching for it, and Conway says this can cost thousands of dollars in legal fees only to lead to a dead-end.
“These individuals don’t have a legal standing under federal law to request information about their parent’s benefits,” he explains. “So the options are to open an estate, secure a probate appointment, and request pension plan information on behalf of the estate of the deceased parent.”
And all of this effort could result in finding out that they’re not entitled to a pension.
Surviving or divorced spouses
So, who can inherit a pension — and why? Spouses. The system was designed this way on purpose.
“Pensions were adopted on large scale during a different time in American society, and reached their peak offering when households were typically living on one income,” Conway explains, adding that Social Security worked in much the same way.
“The belief was that a spouse who stayed at home should have financial security,” he says, “and if the wage earner died, there was a general fiduciary sense that a spouse should be protected.”
In the event of a divorce, Conway says a pension can be divided between the two parties. “Under federal law, an employee benefit plan must recognize the marital division of assets as long as it receives a copy of the order dividing the retirement benefits,” he says. “The policy reasons for this are much like a surviving spouse option — a pension earned during a marriage is a marital asset.”
Also see: Are you missing out on a pension? How to get what you’re owed.
Rare exceptions of payouts to children
Although rare, there are exceptions that allow payouts to children. They are found, typically, in the design of governmental benefit plans.
“For example, some plans allow a survivorship pension or a survivor’s pension,” Conway explains. “This allows an employee to list a relative other than a spouse as the beneficiary to inherit the pension.”
However, he says there are usually restrictions, such as choosing to either leave the pension to a spouse or to one’s children.
“From an actuarial standpoint, these survivorship pensions can present unique issues,” Conway adds. “There are scenarios where a pension could last as long as 70 years or more, depending on the age of the child.”
Koppelman agrees that the spouse is usually required to be the beneficiary. However, he says spouses may be able to sign away their right to inherit the benefit.
“Under most plans, a non-spouse inherited pension plan would be paid out in a lump-sum that could be moved to a Beneficiary IRA or Inherited IRA,” Koppelman says. “Per the Secure Act of 2019, an inherited IRA must be fully distributed by Dec. 31 of the 10th year following the death of the original account owner.” However, he says spouses aren’t subject to this 10-year rule.
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Benefits that can be handed down
There are some types of benefits that can be left to children — and Conway says they don’t require a will. “For example, retiree life insurance can be left to a child just by filling out a beneficiary form.” In addition, he explains that some plans — for example, among unionized workers — offer a death benefit that may be used to cover funeral expenses.
“The same is true for the balances held in 401(k) or 403(b) plans and other contributory savings plans that employee benefit plans offer,” Conway says. If those funds come out of the employee’s own paycheck, he says those benefits can usually be passed on to heirs. “And the upside is for some of those benefits, they continue to enjoy a tax-deferred status until distribution.”
However, keep in mind that minors can’t legally own property. “If a minor inherits a retirement asset, such as an IRA, a guardian will be placed in charge of those assets until the child reaches the ‘age of majority’ in their state,” Koppelman says.
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So, the 10-year rule won’t start until the minor reaches the age of majority. While this age is 18 in most states, Koppelman explains it’s 19 in Alabama and Nebraska, and 21 in Mississippi. “Adult children can receive retirement benefits as either a lump sum or roll through beneficiary/inherited IRA,” he adds.
Terri Williams has over 10 years of experience writing about student loans, mortgages, real estate, budgeting, home improvement and business in general. Her work has appeared in The Economist, TIME, Architectural Digest and Realtor.com.
This article is reprinted by permission from NextAvenue.org, ©2023 Twin Cities Public Television, Inc. All rights reserved.
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