When was the last time your reviewed the beneficiary designation form from your retirement plan, IRA, life insurance policies or annuities? If your answer is typical, you don’t remember.
A recent U.S. Supreme Court decision should motivate some people to move this overlooked step higher on their priority list. This particular ruling involved a 401(k) plan, but it could apply to all plans or investment vehicles that require beneficiary designations. The case involved is Kennedy v. Plan Administrator for DuPont Savings and Investment Plan. Mr. and Mrs. Kennedy were married in 1971. Shortly after their marriage, Mr. Kennedy completed a beneficiary designation form naming Ms. Kennedy as his sole beneficiary.
The Kennedys subsequently divorced in 1994. As part of the divorce decree, Mrs. Kennedy waived all her rights to any retirement benefits relating to Mr. Kennedy’s employment. However, it was later discovered that this state court divorce decree did not meet the standards for a Qualified Domestic Relations Order (QDRO). A QDRO describes how certain items, such as qualified retirement plans and child support, will be handled in the case of a divorce. Of course, to further complicate this situation, Mr. Kennedy never followed the plan’s procedures for changing his 401(k) beneficiary after the divorce, although he did change the beneficiary designation on his company pension plan.
Mr. Kennedy died in 2001 and his daughter acting as executrix of his estate, informed the plan administrator and asked that the proceeds of the savings and investment plan be distributed to the estate. However, the plan administrator reviewed the beneficiary designation form on file and forwarded the $402,000 to the former spouse, Mrs. Kennedy, as she was the sole beneficiary shown. The daughter then sued the plan administrator, claiming they had erred in distributing the funds.
The Supreme Court ruled in favor of the plan administrator, finding they had followed the plan’s procedures and should not have been expected to know about the existence of the divorce decree in which Mrs. Kennedy waived her rights to the 401(k). The Supreme Court said, “Under the terms of the Investment Plan, Mrs. Kennedy was Mr. Kennedy’s designated beneficiary. The plan provided an easy procedure for Mr. Kennedy to change the designation, but for whatever reason, he did not. The plan provided a way to disclaim any interest in the account, but Mrs. Kennedy did not purport to follow it and, therefore, the documents controlled so Mrs. Kennedy won the case.
So failure to fill out and complete a beneficiary designation form and keep it current can have negative consequences. It is especially important to review these forms after major life events such as marriage, divorce, death of a loved one or birth of a child. It is equally important to ensure that beneficiary designations are consistent with the provisions of one’s estate planning documents. These crucial steps will guarantee the assets controlled by beneficiary designation align with the participant’s estate plan and wishes.
Steven W Tarta has been providing Estate Planning and Elder Law services for over 25 years. His focus has been on “Asset Preservation” resulting in the elimination or reduction of Federal Estate Taxation by the use of Revocable and Irrevocable Trusts. Also, Steven is very concerned with quality of life issues as they relate to his Elder Law practice. Steven provides a conservative and professional approach which analyzes the client’s objectives and creates an appropriate strategy for Asset Preservation as well as addressing all Elder Law issues. Mr. Tarta is also a member of the LawGuru Attorney Network.