Outdated papers lead to loss

In a court battle that started in 2001, Kari Kennedy lost a $402,000 inheritance because the beneficiary form didn’t name her, even though that is what her father wanted.

In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, decided Jan. 26, the Supreme Court unanimously ruled that the ex-spouse should receive the retirement plan money because she was named on the beneficiary form, even though she waived her rights to that money in a divorce decree.

The high court ruled that a company plan must pay the beneficiary named on the beneficiary form, even in light of contradictory signed agreements.

William Kennedy died in 2001, three years after he retired from E.I. du Pont de Nemours & Co. of Wilmington, Del. He had worked for 24 years for DuPont, contributing to the company plan (a savings and investment plan that qualifies under the Employee Retirement Income Security Act of 1974).

Mr. Kennedy married Liv Kennedy in 1971, and in 1974, he signed a beneficiary form naming her as the beneficiary. There was no contingent beneficiary named on the form.

The two divorced in 1994. Under the divorce decree, Ms. Kennedy waived her rights to any benefits under his retirement plans.

Mr. Kennedy wanted the plan balance of $402,000 to go to his daughter, Kari Kennedy, but he never changed the beneficiary form on this plan. He did, however, change it on another plan.

After Mr. Kennedy’s death, Kari Kennedy, as executor of his estate, asked DuPont to distribute the balance in the plan to his estate since Liv Kennedy had waived her rights to this money and there was no named co-beneficiary on the plan. DuPont, going by the terms of the plan and the beneficiary form on file, instead paid the proceeds out to Liv Kennedy, disregarding the waiver in the divorce decree.

Liv Kennedy died in 2007, but that didn’t change the result. The estate then sued DuPont and the plan administrator for the funds.

Supreme Court Justice David Souter stated that the case was heard in order to decide who is entitled to the inheritance where the divorce decree is “inconsistent with the plan documents.”

The Supreme Court said that you have to look at the terms of the plan and pay out the death distribution accordingly. The person named on the beneficiary form gets the money.

The DuPont plan allows a beneficiary to disclaim plan benefits (not all plans will accept a disclaimer). Liv Kennedy could have disclaimed the plan within nine months of Mr. Kennedy’s death, and the assets would have gone to his estate since there was no contingent beneficiary.

This would have effectively corrected the situation, but Liv Ken-nedy didn’t do this.

In footnote 10 of the case, the court did leave open the option that after the funds were distributed to the ex-spouse, there could be a case against her to recover the funds based on the divorce decree. In part, the footnote states that “the consensual terms of a prior contractual agreement may prevent the named beneficiary from retaining those proceeds.”

Once the funds were distributed from the plan, they were “no longer entitled to ERISA protection.”

The bottom line is that the ex-wife gets the money because she was named on the plan beneficiary form, and that form wasn’t updated to coincide with the divorce decree.

And don’t just check the forms for assets you have under management. Check all the beneficiary forms for your clients.

Beneficiary forms trump all other estate-planning documents. They must be checked to be sure that they carry out the account owner’s wishes and that they are in agreement with other estate-planning documents.

This affects every one of you and all your clients. Companies will have this ruling behind them now to pay only the beneficiary named on the beneficiary form, regardless of what a will, a trust, a divorce decree or other signed documents might say.

Ed Slott a certified public accountant in Rockville Centre, N.Y., created the IRA Leadership Program and Ed Slott’s Elite IRA Advisor Group to help financial advisers and insurance companies become recognized leaders in the individual retirement account marketplace. He can be reached at irahelp.com.