By Ann H. Larkin

When a person dies owning a 401(k) or an IRA, must these accounts be used to pay the decedent’s debts, or are they exempt from the claims of the decedent’s creditors? The short answer is: it depends.

During an owner’s lifetime, 401(k), 403(b), and Individual Retirement Accounts (IRAs) are exempt from claims made by the owner’s creditors up to the amount of approximately $1.2 million dollars. After an owner’s death, if a retirement account designates a beneficiary who survives the decedent, the account will pass directly to that person outside of probate. Typically, a decedent’s creditors will make claims only against his or her probate estate. Because retirement accounts with named beneficiaries are non-probate assets, such accounts avoid the reach of the decedent’s creditors. If a retirement account never becomes part of the probate estate, it cannot be used to pay the decedent’s final bills.

If a named beneficiary does not survive the decedent, the account will likely become part of the decedent’s probate estate, unless the terms of the IRA or 401(k) plan policies provide otherwise. Some retirement plans specifically state that, if a named beneficiary does not survive the decedent, the account will pass to the decedent’s heirs at law, outside of probate. If the policy includes no such provision, or if the decedent names his or her Estate as the beneficiary, the account will become part of the decedent’s probate estate and will be subject to claims of the decedent’s creditors.

If an account owner engaged in misconduct or fraud resulting in improper or illegitimate payments to the account during the owner’s life, a creditor can make a claim against a retirement account, even if a beneficiary has been designated. Pursuant to Federal law, the plan administrator for the account must distribute the funds in the account to the named beneficiary. Once the funds are distributed, the creditor can make a claim against the beneficiary for amounts owed by the account owner stemming from his or her misconduct.