Kennedy v. Plan Administrator for DuPont
With little fanfare, the U.S. Supreme Court ruled on a case back in January that highlights the importance of keeping your beneficiaries up to date. Having a beneficiary on file with one of your financial accounts can make the transition of assets upon death a very simple process. But with this simplicity comes complacency. It’s so easy to simply sign a piece of paper listing your beneficiaries and then forget about it. Unfortunately, if your situation changes or you die unexpectedly without updating your beneficiaries, you may have just created a big mess.
Mr. Kennedy took part in the DuPont Savings and Investment Plan , an employer-sponsored ERISA-governed employee pension benefit plan. Mr. Kennedy designated his wife as the sole beneficiary of his plan benefits. When they divorced, the now ex-wife waived her interest in the Plan benefits through the divorce decree. However, Mr. Kennedy never submitted the waiver prior to his death and the divorce decree never became a valid QDRO. (QDRO stands for Qualified Domestic Relations Order)
In addition, Mr. Kennedy did not remove his ex-wife as his designated beneficiary under the DuPont plan. Upon his death, the plan administrator paid out his benefits to his ex-wife because she was still designated as his beneficiary. The appointed executor of the estate argued that because the order had been issued by a Court, his benefits should instead revert to the estate.
The court unanimously ruled that the ex-wife of a retirement plan participant, who was still named as the beneficiary at the time of the participant’s death, was entitled to the benefits of the plan even though she had signed a domestic relations order waiving her interest in the plan as part of the divorce agreement. The Court concluded that because the divorce decree had not been filed with the plan, it was invalid and was not a Qualified Domestic Relations Order (QDRO), ERISA’s sole mechanism to address the elimination of a spouse’s interest in benefits. Thus, the waiver could not take effect.
You can see how this sort of thing could get ugly very quickly. In this case, through the legal process of filing for divorce the agreement was for Mr. Kennedy’s ex-wife to give up benefits to this plan. Since that was the intention it only makes sense that she shouldn’t have received any benefits upon his death. But the problem is that the plan administrator has no idea what’s going on unless the proper paperwork is filed. Since the QDRO was never filed, DuPont’s administrator had no way of knowing this was the determined outcome. And since Mr. Kennedy did not update his beneficiary form upon finalizing the divorce to list his new beneficiary, the plan must pay out according to what they have on file.
Of course, this assumes that the plan administrator is complying with laws, keeping proper documentation, and updating records accordingly. If the plan administrator had done something wrong, a case could possibly be made that would overrule this type of decision.
Don’t Assume It Can’t Happen to You
Not planning on getting a divorce so you think there’s nothing to worry about? This goes beyond getting a divorce. A death of a spouse, child, or simply a change in plans regarding how you’d like to distribute your assets upon your death are all things that could come up over time. I know, because I’ve seen these things happen firsthand. Getting through a death is difficult enough without having a surprise crop up once assets and benefits start getting dispersed.
Save yourself and your family some trouble and check your beneficiaries regularly. It only takes a few minutes so it’s worth the trouble. And if you do have a major life change that will impact how you wish to have your benefits paid out, get on it right away and don’t wait to make the necessary changes.
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Filed Under: Estate Planning
About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.