In the July, 2011 Financial Planning magazine, there was an article based on a recent court case in Louisiana. In this case, the participant in a 401k plan had named his three children as beneficiaries so that his retirement savings would make up their inheritance. Typically, the beneficiary form trumps all others when dealing with retirement plans. However, in this case, the federal ERISA laws took precedence. Here is what happened. The participant, “Mr. Oops” for this article, had originally named his wife, Mrs. Oops, as sole beneficiary of his XYZ Corporation 401k plan. After her death, he updated his beneficiaries, listing his three children. So far, so good.
In late 2008, just six weeks after he had remarried—probably to a much younger woman—Mr. Oops died. No waiver of spousal rights had been filed after the wedding. Unfortunately, after his death, a dispute arose between the new Mrs. Oops and his three children. Each side claimed ownership of the retirement plan proceeds. The children claimed that, as the named beneficiaries on the most up-to-date beneficiary form, they were the rightful heirs. The widow argued that, as the surviving spouse who had not waived her rights, she was entitled to the proceeds, regardless of what the beneficiary form stated. To support her position, she referred to a section of XYZ Corp.’s plan document which stated that “the participant’s spouse will be the beneficiary of the participant’s entire vested interest in the plan unless an election is made to waive the spouse as a beneficiary”. The children claimed that the use of the word “spouse” should mean a spouse married for at least one year. They cited the ERISA of 1974 which governs 401k plans and does not mandate that a participant receive spousal consent for distributions to someone other than a spouse during the first year of marriage.
A U.S. District Court in Louisiana ruled that Mrs. Oops was the rightful beneficiary of the retirement plan, noting that the plan’s language was “clear and unambiguous” in declaring that unless a spousal waiver was executed, a deceased participant’s vested interest would belong to the spouse. If you, or someone you know, may be in a similar situation, please review your own plan document and related elections and notify your friend of this ruling. This sad outcome could have been avoided with a bit more attention to details. Of course, this assumes that the new wife would have signed the spousal waiver. If you are courting a future spouse, have children from a prior marriage and a corporate retirement plan, you may want to tell your intended that she shouldn’t expect to inherit your retirement plan assets. If the waiver is a problem, consider buying a life insurance policy for the children’s inheritance. You could even take distributions from the 401k to fund the life insurance. These are times when a knowledgeable tax or financial advisor can be worth their weight in gold.
Questions should have been asked, but weren’t. It can also happen in our spiritual life. But as the contributor to the June 15th commentary in the Forward Day by Day wrote, “Questions and doubts are not the opposite of faith; many times they are the seeds of faith. God is ultimately dialogical. The pondering of our hearts, the wonderings of our minds, the questions of our faith are very often God beginning a conversation with us in order to lead us to a deeper knowledge and love of him”. Add the exclamation point from Proverbs 3: “Trust in the Lord with all your heart and do not rely on your own insight; in all your ways acknowledge him and he will make straight your paths”.
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