Posted in Blog - "Altman Speaks"
Beneficiary Designations: An Integral Part of Carrying Out an Estate Plan
On March 3, 2012, a circuit court decided Estate of Kensinger v. URL Pharma Inc., a case with simple facts, a nuanced legal answer, and a practical reminder that filling out beneficiary designations on retirement and other financial accounts is an integral part of carrying out an estate plan.
William Kensinger left his 401k plan to his wife, Adele, through the beneficiary designation process for the plan. The problem, however, was Adele and William divorced 9 months before William died. Adele, as part of the divorce, specifically waived any rights she had as a beneficiary of William’s 401k plan. This was more than a general waiver of any of William’s assets. The divorce agreement specifically and clearly stated that Adele was waiving any right she might have to William’s 401k plan. However, after William died, Adele sought out, and the 401k plan administrator paid to her William’s entire 401k plan balance in accordance with her ex husband’s beneficiary designation.
Although Adele’s actions were unsavory, she actually had a solid legal leg to stand on. The Supreme Court has ruled that, for administrative convenience and to reduce litigation for ERISA plans, such as 401k plans, the designated beneficiary in the 401k plan documents shall remain the beneficiary, regardless of extenuating circumstances. Thus, under the Supreme Court’s “Plan Documents Rule”, the plan administrator was obligated to pay Adele, even though she waived her interest in the 401k plan.
Therefore, William’s Estate was left with daunting federal case law that stood to deny the Estate any recourse as far as changing William’s 401k plan to reflect his divorce and Adele’s waiver, as part of the divorce. The Estate thought of another option, an option the Supreme Court had not ruled against, and actually had indicated was a possibility. The Estate could sue Adele directly to enforce her waiver and recover her disbursements from the 401k plan.
Here, the nuanced legal approach was that the Estate was not fighting the “Plan Documents Rule”; rather, it sued Adele directly after she got her disbursements, not the 401k plan from distributing to her. The 3rd Circuit agreed that the Estate could do this because it did not disrupt the administrative convenience of the “Plan Documents Rule”. That is, the 401k plan administrator did not have to go to Court and did not have to pay anyone other than the named beneficiary. Thus, the Third Circuit was able to weave a ruling that observed the legal precedent (previously decided by the Supreme Court) while allowing the Estate to enforce the explicit waiver Adele agreed to as part of the divorce.
As an estate planning law firm, whenever we read cases like this, our reaction is to figure out what could have been done to prevent the litigation. In this case, if William had simply changed his beneficiary after the divorce, there would have been no lawsuit. Often, we have our clients bring their beneficiary designation forms with them to meetings and we complete them for the client, making sure the beneficiary designation is coordinated with the clients’ estate plan, and insuring that they are sent to the plan administrator. This is a simple task, but as you can see from this case, it can make all the difference.
Please note that since this case has been decided, at least one state has passed a law stating that a once a married couple divorces, any prior beneficiary designation or trust that designated the divorced spouse is no longer valid. While this trend is wonderful to protect individuals from procrastination, it still is only half a loaf. In these cases, the estate plan could still be disrupted, because the default (if the divorced spouse is no longer the beneficiary) may not be the desired outcome. As I have stated many times in these blogs, it is always best to review and update all estate planning documents and beneficiary designations on a regular basis.
See our related article, “Divorce, Remarriage and Blended Families“ for more on the importance of beneficiary designations.
- Gary Altman, Esq. and Michael Wolsh, Esq.