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In a very common scenario, a participant in an ERISA plan (any qualified retirement plan) names his spouse as the beneficiary of his pension plan. The parties subsequently divorce, and although the divorce decree purports to disclaim any interest the spouse may have in the pension, the participant fails to change his beneficiary designation. When the participant dies, how does the plan administrator know where to pay the pension funds?
The Supreme Court answered this question last week in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 US ___ (January 26, 2009). Not surprisingly, the Court concluded that the plan administrator’s responsibility is to comply with the terms of the plan document, which in this case meant paying the benefits in accordance with the beneficiary designation.
What does this mean for you?
Over the past 20 years, I have worked with thousands of individuals to prepare their estate plan and to administer their loved ones estates after death. Many times the wrong person has been named as the beneficiary of a retirement plan, an IRA or a life insurance policy. Luckily, when we are doing estate planning for a client, we are able to change the beneficiary designations to make sure that the right persons (and not a divorced spouse or forgotten friend or former companion) receive the proceeds and benefits after death. Sometimes, however, we only get involved after the death of a loved one and then it is too late. In these situations, many times the wrong person will receive the proceeds and benefits, and some times, even though the right person will receive the proceeds, it only happens after significant legal fees or taxes. And sometimes a minor is named as the beneficiary, and then there are significant court fees and oversight and the minor receives full control at 18, when it may not be appropriate.
What should you do?
Review your estate plan and do a beneficiary audit. Review your Will or Trust to make sure the right persons receive your assets and make decisions for you. Look at every one of your beneficiary designations and make sure that the right person is named to receive the proceeds. If a minor is named, change the beneficiary to be a trust for the minor.
This is just one more lesson that estate planning is a process, and not a product. Moreover, it should remind everyone that if you have not adequate estate planning, now is the time.