Here is a story that perhaps will be a wake up call to some of you out there.
Scott and Erika married in 2005, and as any newly wedded spouse would so, Erika put Scott down as the primary beneficiary on her 401(k) retirement plan she had at the company where she worked.
The marriage did not go well, and they separated a year later. In the divorce agreement, Scott waived his right to any of company holdings or benefits Erika had.
When Erika died in 2011, since Erika never got around to changing the beneficiary on her retirement plan, guess what happened? Scott claimed the money. The parents of Erika sued.
Can you guess who won the suit?
You got it… Scott did. A few months ago, the U.S. Fourth Circuit Court of Appeals decided in Scott’s favour. A solid and embedded rule in federal law states that only those who are expressly named on the beneficiary form can be given money, regardless of anything stated in a will or divorce agreements. The issue of “Fairness”, often seen on other areas of law never arises, and the beneficiary from trumps all else.
Yes, Erika’s parent do have another shot at going after Mark in a civil suit, based on the waiver(s) he signed at the time of the divorce, but this just equals more attorneys and greater litigation expenses.
If Erika has simply taken care of loose ends and taken Scott’s name off the beneficiary form (and all financial accounts for that matter), this never would have happened.
It is important to realize, this is not only the case with Individual Retirement Accounts, but also with other employee benefit plans. The bottom line to remember is, the name on the beneficiary form is the one who controls or gets the benefits.
This is not an uncommon type of incident either. Another case, while single, a man named his sister the beneficiary of his IRA, and when marrying, he forgot to change this information, taking his sister off the form and replacing it with his wife’s. Over the years, the account built up to over $1 million, and when he passed away, his sister received every single penny of the fund.
In yet another case, in divorcing his wife, a lawyer (!) remember to remove his ex-wife off of all accounts, aside from a small IRA account. He later remarried, and forgetting that he still had the ex on this otherwise vagrant account, he rolled almost all of his retirement assets into this account. Yes, when he died, his second wife, even though she sued her husbands financial advisor, she lost the case and her late husband’s resources.
Do you know the beneficiary of your IRA, company life insurance policy, or 401(k)? Have you only named two of your children, forgetting to add the third child after they were born? Leave it to the other two children to share or cut the third child off from your assets? You still have a lingering ex on your paperwork somewhere? Did you name your siblings or parents before you were married and forgot to replace with your new partner?
Retirement plans can, over time, become very large sums of money. Take some time out and look into who is the named benefactor on your beneficiary form, whatever account it might be, company or personal retirement accounts. Do you have the name(s) you want on the forms? If not, change them. And, it’s a good idea to always keep your own set of copies for your files, in which case you will always know, can easily reference, and potentially even use in a court of law.
If you do not have anyone named as a beneficiary, know that your money or assets will be appended to your estate and be provided according to the terms of your will. Why is this not good? Because in most cases, this means the money will be taxed and owed in one lump sum, whereas if you if someone is named on the beneficiary form, the money can be rolled over into an inherited IRA, which can defer part or al of the tax.
How about holdings or assets in other accounts? You can have beneficiary form for mutual funds, brokerage accounts, life insurance, and bank accounts, so we are not just talking company plans here.
In these cases, in most states, the law often protects you from your own self. For instance, in cases of divorce, your ex will automatically be removed from beneficiary forms. The money can go to the second person named on the form or rolled into your estate.
Yet, it is simply a good idea, nay… SMART, to correct these forms, and the laws are diverse, and it is good financial advise to consider talking to someone who knows the laws in your area (or Federal Laws), like a competent financial advisor. It is possible, even if you change the forms, the ex still might have a legitimate case to receive funds.
Anyone on the form, or any ex, will always have a case, no matter what the account, personal or company retirement plans, 401(k)s, or other assets. Regardless, common sense says, avoid as much potential headache as possible by keeping the right people on the any and all beneficiary forms or wills you have.