People get divorced and people die.  Those are just facts of life.  And after a divorce is finalized, folks need to put their new lives in order.  Changes are made to the beneficiaries on their life insurance policies and wills get changed.  New, separate bank accounts are established.  If they remarry and if it is appropriate, they are usually careful to have their new spouse sign a pre-nuptial agreement.  But in all of these changes, there is one important change that very often gets overlooked.  And the failure to make that change can put one of your most valuable assets at risk.  Tens of thousands or millions of dollars could go to the wrong person all for lack of a simple paper called the beneficiary designation form.

I belong to a study group of retirement plan actuaries (don’t ask) and a question was recently posed to the members.  The retirement plan in question was a single member defined benefit plan.  The client had been divorced and had since remarried.  His new spouse signed a pre-nuptial agreement waiving any right to his retirement plan benefits.  Instead, those benefits were intended to go in equal shares to his three sons.

Most retirement plans have standard language baked into them so that in the event of the death of a participant, the beneficiary form will direct the distribution.  But, in the absence of a beneficiary form, plan benefits usually are first paid out to the deceased participant’s spouse, and if there is no spouse, to his or her children in equal shares.  If there is no spouse and there are no children, then the death benefit would be paid to the participant’s estate.

But what about the pre-nuptial agreement signed by the new spouse?  That would ensure that in the absence of a beneficiary form, the death benefit would be paid to his kids, right?

Maybe not.

In 2009, a case known as Kennedy v. DuPont reached the Supreme Court.  William Kennedy was a member of the DuPont Savings and Investment Plan and during his marriage he designated his then wife, Liv Kennedy, as his sole beneficiary.  When the couple divorced, Liv gave up any right or interest related to William’s retirement plan benefits.  William however, never changed the beneficiary form on file with the Plan Administrator.  So, when William died in 2001 his death benefit – about $400,000 – was claimed by both his estate and by Liv.  Per the beneficiary form on file, the Plan Administrator decided that Liv was still the designated beneficiary and paid the benefit to her.

Of course, the estate sued both DuPont Savings and the plan administrator. The district court ruled that the divorce decree constituted a valid waiver of Liv’s right to receive the death benefit and ordered the plan to pay the death benefit to the estate (the estate would then have paid the benefit to William’s children).  But the Fifth Circuit Court of Appeals reversed that ruling, holding that by indirectly transferring her interest to the estate, Liv’s waiver violated ERISA’s anti-alienation provision.

The Kennedy estate appealed, and the case went to the Supreme Court.  The Supremes came to the same result as the Fifth Circuit for a slightly different, but very important, reason.  They ruled that Liv’s waiver would have been acceptable (that it was not an assignment nor alienation) but that the beneficiary form on file clearly made Liv the designated beneficiary.

In ruling that the DuPont plan was correct to strictly adhere to the plan document, the Court noted the importance of following a fundamental concept embedded in ERISA: the plan must always follow the terms of the written plan document.  Full stop.

Returning to the question raised in our study group, a few of us felt that an extremely important question was not being focused on.  Since there was no beneficiary form, if the terms of the plan directed the death benefit to be paid to the deceased participant’s spouse, wouldn’t that be where it must go?  In other words, wouldn’t the terms of the plan trump the pre-nuptial agreement?

An attorney pointed out that his spouse could disclaim the death benefit (since that was clearly the intent, after all, she did sign a pre-nuptial agreement) which would presumably allow the death benefit to be paid to the deceased participant’s kids. The attorney further pointed out that if the widow does not disclaim the benefit, then the kids can sue possibly for not abiding by the pre-nuptial agreement. However, that would mean that attorneys will need to be involved, expenses will be incurred, and all of this could take years to resolve (DuPont v. Kennedy did take eight years to resolve).  Also, in a kind of Catch 22, since only a spouse can waive their spousal death benefit, the pre-nuptial agreement may not have had any legal standing once the couple married because when the pre-nuptial agreement was signed, the person signing it was not yet a spouse.  How can someone waive a right to something they never had in the first place?

Of course, all of this can be avoided if a beneficiary form is completed, and a spousal waiver obtained right after the marriage takes place.  (Granted, not the most romantic of circumstances, but necessary).

You probably haven’t thought about your beneficiary form since you signed up for your first 401(k) plan, years and years ago.  I would strongly recommend that you fill out a current one today and place it where you keep your other important papers.

Why? Because your retirement plan definitively states the order in which your retirement plan’s death benefit will be paid. And in the absence of a beneficiary form, it just might not go where you thought it was going.