Wipfli Alerts & Updates: The Importance of Updating Beneficiary Designations

Most of us have more than enough to do. We’re on the go from early in the morning until well into the evening—six or seven days a week. Thus, it’s no surprise that we may let some important things slide. We know we need to get to them, but it seems like they can just as easily wait until tomorrow or the next day or... whenever.

In the U.S. Supreme Court decision of Kennedy vs. Dupont on January 26, 2009, it reminds us that sometimes “whenever” never gets here, and the results can sometimes be tragic. The case involved a $400,000 employer-sponsored retirement account, owned by William, who had named Liz as his beneficiary way back in 1974 shortly after they married. The couple divorced 20 years later in 1994. As part of the divorce decree, Liz waived her rights to benefits under William’s employer-sponsored retirement plans. However, William never got around to changing his beneficiary designation form with his employer.

When William died in 2001, Liz was still listed as his beneficiary, so the plan paid the $400,000 to Liz. William’s estate sued the plan, saying that because of Liz’s waiver in the divorce decree, the funds should have been paid to the estate. The Court disagreed, ruling that the plan documents (which called for the beneficiary to be designated and changed in a specific way) trumped the divorce decree. William’s designation of Liz as his beneficiary was done in the way the plan required; Liz’s waiver was not. Thus, the plan rightfully paid the $400,000 to Liz.

The tragic outcome of this case was largely controlled by its unique facts. If the facts had been slightly different (such as the plan allowing a beneficiary to be designated on a document other than the plan’s beneficiary form), the outcome could have been quite different and a lot less tragic. However, it still would have taken a lot of effort and expense to get there. This leads us to a couple of important takeaway points.

The first is that if you or your employees want to change the beneficiary for a life insurance policy, retirement plan, IRA, or other benefit, use the official beneficiary form rather than depending on an indirect method such as a will or divorce decree. The second point is that it’s important to keep beneficiary designations up to date. Whether it is because of divorce or some other life-changing event, beneficiary designations made years ago can easily become outdated.

We strongly urge you to both individually review your current retirement plan beneficiary election to ensure it is up to date and encourage you to include contingent beneficiaries to avoid possible issues like the example above, as well as encourage employees to review their beneficiary designations. This is especially important with assets such as retirement plan accounts and IRAs, where naming both primary and contingent beneficiaries can potentially allow payouts from the account to be stretched out over a longer period and maximize the time available for the tax-deferred benefits to accrue.

If you have any questions about the information in this message, please contact Pamela Branshaw, Thomas Krieg, Robert Buss, or your Wipfli relationship executive.

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