Small Estate Affidavits and Retirement Plan Assets

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.  

A recent call with a financial advisor from Minnesota is representative of a common inquiry related to retirement account beneficiaries. The advisor asked: “One of my clients who sponsors a 401(k) plan asked me about a “small estate affidavit;” what is it and can it be used with retirement account assets?”

Highlights of the Discussion

A small estate affidavit is a creature of state law. A small estate affidavit is a sworn written statement that authorizes someone to claim a decedent’s assets outside of the formal probate process when the estate is below a set value. Each state that authorizes the use of such documents sets forth the process and procedure for their use in state statute. For example, the governing Minnesota state statute for collection of personal property by affidavit is §524.3-1201 when the value of the estate does not exceed $75,000. 

A small estate affidavit may come into play when a person dies “intestate,” that is, without a will (or named beneficiaries in the case of retirement plan assets.) Usually, the estate of a person who has died intestate goes through probate court to determine who will inherit the decedent’s assets. Use of a small estate affidavit can bypass the probate process. 

When it comes to retirement plan assets, ERISA 3(8) allows participants to designate beneficiaries directly. The governing plan documents will outline the steps and forms necessary to properly assign beneficiaries of the plan. Federal law requires the spouse of a plan participant to be the beneficiary by default, unless he or she formally waives his or her right to the assets. If a participant fails to properly designate a beneficiary, or if no beneficiary so designated survives the participant, most plan documents specify the beneficiary shall be the surviving spouse, or if there is no surviving spouse, the deceased participant’s estate.  

Whether a plan sponsor or plan administrator should honor a small estate affidavit is an important legal question. A “best practices approach” for plan sponsors could include the following steps. 

1.  Review what the governing plan document says about the distribution of assets when no beneficiary is named, particularly with respect to the use of small estate affidavits. 

2.  If the plan document is silent on small estate affidavits, determine if there are distribution administration policies in place that address the use of small estate affidavits. 

3. Absent plan document and distribution policy guidance, or if the guidance is unclear, seek the advice of an attorney and document the recommended course of action. 

4. Consider formally addressing the use of small estate affidavits within the plan’s distribution policies and/or plan document. 

Conclusion

Plan administrators may encounter small estate affidavits when a deceased plan participant’s estate is small as determined by state law. Honoring a small estate affidavit is an important legal question for plan sponsors. The most prudent course of action would be to proceed with caution with the guidance of legal counsel.