A Discussion Forum for the Mississippi Estate Planning Community
Tag Archives: ERISA
According to Cogent Research LLC, a Cambridge, Mass., research and consulting firm, IRAs and 401(k)s now account for roughly 60% of the assets of U.S. households with at least $100,000 to invest. Most people are unaware that a single sheet of paper and some tricky rules govern who will receive these assets when they die.
Qualified Retirement Plans sponsored by employers including 401k plans, defined contribution (aka profit sharing plans) and pension plans are governed by The Employee Retirement Income Security Act of 1974 (ERISA) which require that spouses of participant plans be considered as primary beneficiary unless the spouse waives his or her rights under the plan. This rule has prevailed in courts even in cases of divorce or a first spouse’s death or when the participant failed to update his beneficiary form.
Consider the case of CHARLES SCHWAB & CO. v. CHANDLER in the US Court of Appeals, Ninth Circuit. Wayne Wilson married Katherine Chandler in 2000 after having lived with her unmarried for ten years. In 2002 he opened an IRA at Charles Schwab Corp. and named his four grown children from a prior marriage as beneficiaries. The IRA funds originated from Wilson’s former employer’s 401k plan. Three years after that, at the age of 65, he died. His wife tried to claim the IRA assets, arguing for spousal protection under ERISA. But last year the U.S. Court of Appeals for the Ninth Circuit awarded them to the children, ruling that spouses have no ERISA rights to IRA benefits.
This ERISA loophole adds flexibility to participants with large 401k Plan balances, but can also undo the very protection that the law was designed to protect.
More recently, in Cajun Industries LLC v. Robert Kidder, et al., the U.S District Court ruled that a spouse was entitled to the Participant’s death benefit arising from his 401k plan even though his beneficiary designation clearly named his four children from a previous marriage as beneficiaries. Since no spousal waiver had been obtained, the default plan beneficiary was the participant’s spouse, even though she was not the named beneficiary. In this particular case, the spouse inherited the 401(k) after just six weeks of marriage.
Finally, the U.S. Supreme Court weighed in on the issue in the case of Kennedy V. Plan Administrator For Dupont Savings And Investment Plan et al. William and Liv Kennedy divorced after 20-plus years of marriage. As part of their divorce agreement, Liv waived her rights to any benefits under William’s DuPont Co. retirement plan. William never remarried. He also never changed the beneficiary designation on his retirement account from Liv. When William died, a dispute arose between Liv and the couple’s daughter, Kari Kennedy, over who had the right to the funds in the DuPont plan. After conflicting rulings in the lower courts, the Supreme Court agreed to hear the case and in a unanimous decision in 2009 held that the person named on the beneficiary form gets the money—even if that person happens to be the employee’s ex-spouse, and even if that ex-spouse waived any right to the money in a divorce agreement. Kari Kennedy was disinherited.
The lessons from these stories are plentiful. To Plan participants, let your advisors know when there are any changes to your marital status, and seek professional counsel when designating retirement plan or IRA beneficiaries. Remember, beneficiary assets are NOT controlled by your will unless your estate is the named beneficiary. To advisors, review your client’s beneficiary designation and Plan documents with the same thoroughness as you would a will, deed, or other estate document. Often the beneficiary form will control more assets than your client’s Will. To spouses of Plan participants, be aware that your rights are different under non-ERISA plans such as IRA’s than they are under traditional employer plans. A coordinated estate plan that considers all of these factors is the best way to prevent unwanted results.
For more information, see the Wall Street Journal Online article, Family Feuds: The Battles Over Retirement Accounts .