Key Takeaways
- A DuPont employee’s ex-wife collected his savings plan’s balance of about $400,000 when he died in 2001, because her name was still on the beneficiary form even though she had given up those benefits in their divorce.
- In 2009, a unanimous Supreme Court ruled that the plan was right to pay her, since a workplace plan covered by federal law has to pay by its own documents, and the beneficiary form is one of them.
- Anyone with a 401(k), pension or other workplace plan who divorces, remarries or loses a family member is exposed, because neither a will nor a divorce decree changes who the form names.
- The fix is a new beneficiary form for each plan, a QDRO for any plan a divorce splits, and a new spouse’s written consent if the account is meant for someone else.
If you’ve been through a divorce, here’s some unwelcome news: a one-page beneficiary form you signed years ago can override the settlement your lawyers spent months on. And if you never changed it, your ex could walk away with your 401(k).
Taylor Schulte retold a case that shows how on this week’s episode of the Stay Wealthy Retirement Podcast, and it went all the way to the Supreme Court.
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He updated one form and forgot the other
William Kennedy worked at DuPont and saved through the company’s savings and investment plan. In 1974, he named his wife, Liv, as the plan’s beneficiary. They divorced in 1994, and under the decree, Liv gave up her rights to his retirement benefits.
After the divorce, William signed a new form naming his daughter, Kari, as the beneficiary of a separate DuPont pension plan. He never filed one for the savings plan. When he died in 2001, Kari, as executor of his estate, asked DuPont to pay the savings plan to the estate. DuPont went by the form on file instead and paid the balance of about $400,000 to Liv.
Ouch.
The estate sued, and in January 2009 the case ended at the Supreme Court. As Schulte put it, “the court unanimously ruled that the plan had properly followed the beneficiary form, even though Liv had clearly waived her rights to those dollars in the divorce.”
Workplace plans pay whoever’s on the form
The rule behind that ruling is federal. A private-employer plan covered by ERISA, the federal law behind 401(k)s and pensions, has to pay benefits according to its own written documents, and the beneficiary form on file is one of them. If a divorced worker never changes that form, the ex-spouse can still collect, even when the divorce decree says the ex gave those benefits up. A will isn’t a plan document either, so it can’t redirect the money.
That leaves two ways to change who gets paid: a new beneficiary form, or a qualified domestic relations order (QDRO), the court order a plan follows to split benefits in a divorce. Liv’s promise in the decree was neither.
IRAs aren’t ERISA plans, so this rule doesn’t decide who inherits one. They carry beneficiary forms of their own, though, and Schulte’s view is that for most retirement accounts, whoever is named on file generally inherits, whatever a will or a divorce decree says.
Remarried? Your new spouse may come first
A second marriage brings a wrinkle that runs the other way. Many workplace plans make a married participant’s spouse the primary beneficiary, and let the participant name someone else only if the spouse consents in writing. Schulte gave an example: name your children after a divorce, remarry, and the new spouse could inherit the account anyway unless they sign off. He added that the waiver needs a signature witnessed by a notary or a plan representative, and that a prenup generally won’t do, “because it’s signed before the marriage.”
What to check after a divorce, a wedding or a death
Schulte suggests reviewing the beneficiaries on every retirement account, backups included, at least once a year. These are the forms worth pulling out after a divorce, a remarriage or a death in the family:
- Every workplace plan’s beneficiary form, one plan at a time, since a form filed with one plan does nothing for another.
- A QDRO for any plan a divorce settlement splits, since the decree alone doesn’t bind the plan.
- A new spouse’s written consent, if the account is meant for someone else, such as children from a first marriage.
- Every IRA’s beneficiary form.
- Any HSA’s beneficiary: a spouse named on it takes it over as their own HSA, while anyone else is taxed on the account’s whole value in the year you die.
Frankly, this is the cheapest fix in retirement planning, and I’d get it done before the year is out. William Kennedy’s family ended up at the Supreme Court over a form he could have changed himself.
Of course, the justices decided only what the plan owed. They left open whether the estate could have sued Liv for the money once she had it, but that’s a lawsuit no family wants to file.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any of the stocks mentioned. Thank you for reading, and happy investing!
