The Supreme Court decision (Kennedy v. Plan Administrator for DuPont Saving and Investment Plan). illustrates the importance of making sure your beneficiary designations are up-to-date. The Court unanimously ruled that an employer must give a deceased employee’s retirement benefits to his ex-wife even though she had renounced the benefits in their divorce. The employee worked for DuPont which had a retirement plan. When he was hired he named his wife as beneficiary of that plan. He later divorced and the wife agreed to give up her right to the plan benefits. But, the employee never filed a new beneficiary designation form. When he died, his ex-wife was given the benefits ($400,000) as she was the named beneficiary.
His other family members sued, claiming that the divorce decree should control, and the funds should go to the Estate and the rightful heirs. They won in District Court but the Supreme Court over-ruled that decision. In an opinion written by Justice David Souter, the Court held that according to the Employee Retirement and Income Security Act (ERISA), DuPont had to follow the instructions on the beneficiary form and distribute the retirement benefits to the ex-wife. The Court noted that the employee could have easily changed his beneficiary designation, but he did not follow through and do it.
You must coordinate all of your Estate Planning documents. Your Will, your Trust (if any) and your Beneficiary Designations (for Retirement funds and life insurance) should all work together to accomplish your goals. You must check your beneficiary designations periodically and update them as necessary. Keep these issues in mind:
- It is vital to name a beneficiary for retirement funds. Do not assume that your retirement plan will be distributed according to your Will. If you don’t name a beneficiary, the distribution of benefits may be controlled by state or federal law or according to your particular retirement plan. Some plans automatically distribute money to a spouse or children. While others may leave it to the retirement plan holder’s estate, which could have negative tax consequences. The only way to control where the money goes is to name a beneficiary.
- You may want to designate a trust as your beneficiary. If your estate is large enough, it may make sense to direct that retirement funds be payable to a trust rather than to the surviving spouse. The trust must be properly drafted to avoid tax consequences, so consult with an attorney before doing this. If you want your money to go into a trust for your children, be sure to designate the trust as the beneficiary. If you name your children, the money will go directly to them.
- If you have major life changes, be sure to keep your retirement plan updated. If you get married or have children, you may want to change your beneficiary. If you get divorced, you must update your beneficiary.
- Even if you don’t have big changes, you should review your beneficiary designations periodically. Your beneficiary may not be who you remembered it to be or it may be outdated. For example, if you named a charity as beneficiary, you will want to make sure the charity still exists. A Change of Beneficiary form can often be downloaded from the Web site of the firm holding the plan assets.
Your Elder Law Attorney should discuss Beneficiary Designations when working on your plan. If you don’t have a Will or Trust you should see an Elder Law/Estate Planning lawyer as soon as possible. Find out all of the information regarding your life insurance and retirement plans and have your attorney help you review it to ensure it works with your other planning such as your Will and Trust.