It’s no surprise that, in the midst of busy everyday life, clients may let some important matters slide. They are aware these matters need attention, but it seems as though they can just as easily wait until tomorrow, the next day, or whenever.
A U.S. Supreme Court decision reminds us that sometimes “whenever” never gets here and the results can be tragic. The case involved a $400,000 employer-sponsored retirement account, owned by William, who had named his wife, Liv, as his beneficiary in 1974 shortly after they married. The couple divorced 20 years later. As part of the divorce decree, Liv waived her rights to benefits under William’s employer-sponsored retirement plans. However, William never got around to changing his beneficiary designation form with his employer.
When William died, Liv was still listed as his beneficiary. As a result, the plan paid the $400,000 to Liv. William’s estate sued the plan, arguing that because of Liv’s waiver in the divorce decree, the funds should have been paid to the estate. The Court disagreed, ruling that the plan documents (which called for the beneficiary to be designated and changed in a specific way) trumped the divorce decree. While William’s designation of Liv as his beneficiary was completed in the way the plan required, Liv’s waiver was not. Thus, the plan rightfully paid $400,000 to Liv.
The tragic outcome of this case was largely controlled by its unique facts. If the facts had been slightly different (such as the plan allowing a beneficiary to be designated on a document other than the plan’s beneficiary form), the outcome could have been quite different and much less tragic. However, it still would have taken significant effort and expense to get there. This leads us to a couple of important points:
1. If your clients plan to change the beneficiary for a life insurance policy, retirement plan, IRA, or other benefit, use the plan’s official beneficiary form rather than depending on an indirect method, such as a will or divorce decree.
2. It’s important to keep your clients’ beneficiary designations up to date. Whether due to divorce or another life-changing event, beneficiary designations made years ago can easily become outdated.
Finally, while your clients are verifying that their beneficiary designations are current, make sure they have also designated secondary beneficiaries where appropriate. This is especially important with assets such as IRAs, where naming both a primary and secondary beneficiary can potentially allow payouts from the account to be stretched out over a longer period and maximize the time available for the tax deferral benefits to accrue.