by Troy E. Kennedy
for the Business Journal
In a recent hearing, the Sixth Circuit Court of Appeals ruled that a man's ex-wife was entitled to his pension and retirement benefits at his death, even though their marital dissolution agreement specified that she waived any interest in his employee benefit property.
How could this happen? A husband and wife divorced in 1994 after 10 years of marriage. As part of the negotiations, the dissolution agreement specifically awarded the husband all of his own employee benefits. Additionally, his ex-wife signed a waiver divesting all of her "rights, title and interest" in his property.
Unfortunately, 41 days after the divorce the husband died, prior to changing the beneficiary designation from his ex-wife to his daughter. Furthermore, he died without a will.
The daughter then provided the divorce decree and dissolution agreement to the plan administrator, assuming that this would, in effect, void the current beneficiary designation. Instead, the employer paid the entire account, totaling $169,000, to the designated beneficiary, the ex-wife.
The daughter sued for breach of contract and conversion. The Employee Retirement Income Security Act (ERISA), which governs retirement plans, provides distribution rules for determining who is entitled to benefits when a participant in a retirement plan dies.
The 6th U.S. Circuit Court held that ERISA overrides state law and that beneficiary designations control the distribution of employee benefits from ERISA Plans. ERISA doesn't provide any exceptions for cases when the named beneficiary has agreed to waive his or her "rights, title and interest" in the benefits.
Furthermore, the court said that even if the court did allow for such waivers, the waiver in this case would not apply because the waiver did not specifically refer to the ex-wife's "beneficiary interest."
Although the ex-wife did not realize it at the time, she held a beneficiary interest that she did not specifically waive when she waived her "rights, title and interest' to her ex-husband's employee benefits.
The case was ultimately dismissed, and the benefits remained the ex-wife's, even though the dissolution agreement said she would receive nothing.
As you can see, keeping your beneficiary designations up to date is extremely important, but unfortunately it's an issue to which many individuals pay far too little attention.
With any type of account IRA, 401(k), insurance contract beneficiary designations require special attention. Because circumstances continually change, we suggest that you contact your IRA custodians, insurance agent and human resource officer periodically to review your beneficiary designations, just to make sure that you have properly designated who you want to receive these funds.
(Troy E. Kennedy is a senior vice president and shareholder of Springfield Trust Company, a locally owned, independent trust company managing approximately $300 million in investments.)
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