Be sure to review the beneficiary designations of your accounts and keep them updated. If you do nothing else about estate planning, do that. Your IRAs and other accounts go to the beneficiary named in the account forms and the plan documents. Your will, living trust, and other documents don’t cover these accounts. These often are the most valuable assets people own, but too often the account forms are done wrong or aren’t up to date.
Consider two recent cases that show how easily and often such oversights are made.
The first case involved a successful and financially sophisticated attorney. He owned a number of qualified retirement accounts: IRAs and a law firm profit-sharing plan. His wife was named the beneficiary of these accounts. The attorney then divorced her and married a second wife. He changed the beneficiary to his estate on most of his accounts, including the law firm profit-sharing account.
Subsequently he rolled over the profit-sharing account to one of his IRAs. Unfortunately, this was the one account for which he hadn’t changed the beneficiary. His ex-wife still was named as the beneficiary. He died unexpectedly and before realizing the mistake. The IRA custodian paid the entire IRA to his ex-wife.
The estate (of which the second spouse was the executrix) filed an arbitration claim against the custodian, arguing the estate should be the beneficiary and even claiming the custodian was negligent and breached its fiduciary duty by not ensuring periodically the beneficiary designation was correct.
The estate lost. The custodian has no duty to periodically review the beneficiary form and check with the account owner to ensure the designation is correct and consistent with the owner’s other accounts. This is true even if the account has a broker or other employee assigned to responsibility for it.
The arbitration panel hearing the case said it was clear the attorney didn’t intend for his ex-wife to inherit any of his accounts. But he made a mistake by not changing the beneficiary designation of this IRA, and the panel couldn’t do anything to correct that mistake. The IRA owner is responsible for ensuring the forms are correct. The ex-wife inherited his IRA.
The second case is a more difficult one and shows you have to investigate beyond the beneficiary designation form to ensure your account goes to the beneficiary you want.
The deceased had a 401(k) plan and three children. He initially named his first wife as beneficiary of the account. After she passed away he named his children as the beneficiaries of the 401(k) account. Subsequently he remarried. He passed away six weeks later.
Though his children were named as beneficiaries, the documents for the 401(k) plan stated that a member’s spouse is the beneficiary of his or her account unless the spouse signs a waiver of the rights with the plan administrator. No spousal waiver form was filed, and it’s likely the account owner didn’t know of the rule or requirement.
The widow and the children disagreed over who was entitled to the account and sued to have a court decide.
The court ruled that the plan documents control. Once the employee married the second wife, she became the beneficiary under the plan documents. The beneficiary designation form had no affect under the plan unless a spousal waiver form were filed.
These cases make clear that your will, living trust, prenuptial agreement, postmarital agreement, written expressions of intent, intention as expressed in other account beneficiary forms, and other evidence don’t matter. The beneficiary designation form decides who inherits the account.
The only factor that can trump the designation form is the plan’s documents. Many employer plans have a provision similar to the one in the second case. A current spouse automatically is the beneficiary unless the spouse files a waiver consenting to a different beneficiary. IRAs don’t have such a provision. You can name any IRA beneficiary you want without obtaining the consent of your spouse.
You also generally can’t avoid the spousal waiver requirement by rolling over an employer plan account to an IRA. Most employer plans that have a spousal consent requirement won’t allow the rollover without consent from the current spouse. If the employee in the second case had rolled over the account to an IRA before his second marriage, he could have done so and named the children as beneficiary without anyone’s consent, since he didn’t have a spouse at the time.
You need to check the beneficiary designation forms of all your accounts regularly to be sure they say what you currently intend. You also need to examine the plan documents of any employer plans in which you have accounts, if your intention is to name anyone other than your spouse as beneficiary.
Retirement plans are not the only assets you need to review. Beneficiary designation forms also control life insurance policies and annuities. Plus, you need to review the terms of living trusts any time there is a change in your life that could change your intentions.
RW August 2011.
Log In
Forgot Password
Search