Beneficiary Designation - The Form Prevails

Sadler v. Buskirk, No. 2012-CA-001157-MR (Ky. App. 2013)
Court Denies Widow's Request that Former Spouse Should have No Rights as Beneficiary

Rendered: November 22, 2013
Opinion Affirming 

I think I can capture your attention by simply skipping right to Judge Taylor’s Concurring Opinion:  

[F]or domestic relations practitioners in Kentucky, this area of law remains a malpractice trap and should be reviewed and scrutinized closely in every divorce.

Okay, now some backdrop, and then I’ll get right to how to best avoid said “malpractice trap”. 

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In the underlying divorce action, the property settlement agreement (PSA) awarded each spouse his or her own IRA and they each waived any claim to the other’s IRA.  The parties further waived their rights to take against each other’s estate upon death.  Husband later remarried but – before his passing – failed to change his beneficiary designation to someone other than Former Wife.  The IRA administrator informed Husband’s ‘new’ wife (Widow) that Former Wife was the named beneficiary on the internal IRA account forms.

As the administrative executrix of Husband’s estate, Widow then filed motions to intervene and to declare that Former Wife had no rights to the IRA account.  Widow argued that Former Wife had no right to the IRA because of the terms of the PSA.  The trial court denied Widow’s declaratory motion.  In affirming, the Court of Appeals duly noted that Husband had ownership of the IRA, and as owner, he had the authority to designate a beneficiary as he did, designating Former Wife.  The Court further concluded that Former Wife was not claiming any ownership of the IRA itself, but rather, she was the passive recipient receiving only a beneficial interest because of Husband’s act.  Thus, the Court held that the PSA was not thwarted because “[Former Wife] is not claiming ownership of the IRA but merely receiving, as a result of Husband’s authority as owner of the account, the concomitant result of his beneficiary designation.”

So how do you avoid the malpractice trap?  When applicable, specifically include in the PSA a mutual waiver of the parties’ right to ownership and any beneficial interest of the retirement account, including the right to receive the proceeds upon the death of the party who owns the account.  Aside from the state retirement system, most plans will not have a proviso automatically terminating the former spouse’s beneficial interest upon divorce.  Kentucky law relating to non-testamentary transfers and multiple party and payable on death accounts all have the same effect, i.e., divorce does not terminate a former spouse’s beneficial interest.

A final note, qualified retirement plans (e.g., 401(k) or traditional pensions) under ERISA’s “Plan Documents Rule” preempt state law as to any waiver as part of a divorce decree.  See Kennedy v. Plan Adm'r for DuPont Sav. and Inv. Plan, 497 F.3d 426 (2009).  So, as with the IRA in this case, a qualified plan will always pay the beneficiary designated on the plan’s forms despite any decree or PSA to the contrary.  But, as seen in this case, the Widow’s declaratory motion may have met a more favorable result had the above language been included in the PSA.

Of course, Husband simply changing his beneficiary designation with the account administrator would have obviated all of this.  A not-so-subtle reminder that when representing the owner of a retirement account, it may be prudent to advise, perhaps as part of any client closing letter, that divorce does not automatically terminate the account beneficiary designation and that he or she must contact their retirement account plan if they wish to change the designation.