The case of Kennedy vs. Plan Administrator, the Plaintiff, Mr. Kennedy, executed a beneficiary designation form naming his spouse as his primary beneficiary of his retirement plan in the event of his death. Thereafter, Mr. Kennedy divorced his wife and his ex-wife waived any rights to any proceeds from the retirement account. In spite of Mr. Kennedy's ex-wife's waiver of her rights in the divorce decree, the U.S. Supreme Court recently decided that the beneficiary designation form, not the divorce decree, governs who should receive the balance of Mr. Kennedy's retirement account as beneficiary. As a result, Mr. Kennedy's ex-wife received the balance of his retirement account funds.
The facts and circumstances of the Kennedy case represents an oversight made far too often by divorced individuals who maintain retirement plans. Mr. Kennedy's divorce attorney should have advised his client to remove his ex-wife as beneficiary of his retirement account. Based on the fact that the individuals were divorced, no consent form would have been required under federal law for the husband to remove his ex-wife as the beneficiary. Divorced individuals should also give attention to the beneficiary designations on life insurance policies and other accounts where a former spouse may remain listed as beneficiary. Failure to pay attention to these important details could result in proceeds from retirement accounts and life insurance policies being distributed to unintended beneficiaries.
Dan A. Penning
The above information was recently emailed to our clients. Shortly afterwards I received the appended information below from Eric Braund, CRPC, Financial Planner with Rehmann Financial in Traverse City, Michigan. The information was originally published in Money Magazine.
5 things to know about naming beneficiaries
BY ISMAT SARAH MANGLA, MONEY MAGAZINE — 03/12/09
Don't want your intended heirs to have to chase after their money? Better make sure they're listed on your financial accounts.
(MONEY Magazine) -- Your estate plan is in place. Or is it? Not if you have out-of-date beneficiaries on your financial accounts. The Supreme Court has agreed to hear the case of a woman suing her late father's pension plan for money she believes should be paid to her, not her mother - who was still listed as the sole beneficiary even though she forfeited rights to his pension in their divorce. Know these things to avoid a similar mess.
1. Your will has no jurisdiction.Accounts with beneficiary designations - such as IRAs, 401(k)s, insurance policies and annuities - aren't governed by your will, says Allentown, Pa. investment adviser Kevin Brosious. So even if you wrote an ex out of your will eons ago, he or she would still get, say, your IRA if you never changed its beneficiary. Lesson: Review choices periodically, especially after major life events. Also, don't leave beneficiary forms blank. Accounts then go to probate court for distribution, and rules on who gets what vary by state.
2. You can - and should - name a runner-up. Just as the Miss America judges pick a No. 2 just in case - remember Vanessa Williams? - so too should you pick a contingent beneficiary for your accounts. Otherwise, if your primary beneficiary dies before you, the account goes to probate. Naming a No. 2 also gives the primary the option to execute a qualified disclaimer, which passes the inheritance to the contingent without gift taxes, says Steve Hartnett of the American Academy of Estate Planning Attorneys.
3. Retirement accounts have quirky inheritance rules. With IRAs and 401(k)s, there are advantages to naming a spouse over a child. Your partner can roll over such accounts into his or her name, thus postponing distributions and taxes until age 701⁄2. But if your kid inherits, she must start taking distributions - and paying tax on them - the year after your death, says San Diego estate attorney Roy Doppelt. (Regardless of estate taxes, retirement account recipients pay income taxes on payouts.) Also, avoid listing your estate as beneficiary. By law, heirs then must empty the account within five years, which could cost them investment gains and bump them to a higher tax bracket.
4. Naming a minor is a quick ticket to probate. In most states, the court must supervise the distribution of money left to kids under 18 - a slow and potentially costly process. But you can circumvent probate by having an attorney set up a trust in the child's name (cost: usually $750 to $1,500), says Helen Modly, a financial planner in Middleburg, Va. A trust also lets you have more control - for example, you can require that Junior graduate from college before getting payouts.
5. Changing beneficiaries is easier than changing the filter in your coffee pot. Many financial firms make beneficiary forms available online. You can also call to request them. (Or if this task will end up last on your long todo list, give your estate attorney permission to contact the institutions for you.) To name a new beneficiary, all you'll need is the person's birth date and, sometimes, Social Security number. Make copies of any form you submit, and request written confirmation. Store a master list of accounts and beneficiaries with the rest of your estate documents.
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