ERISA regulation trumps prenuptial agreement

If you have clients with sizable pension plans who are getting married for the first, second or third time — or more — the question of who gets the pension plan after death must be agreed upon now, and the agreement must hold up when the time comes to pay beneficiaries. But that often isn’t what happens, as the 2006 case of Debbie and David Sandler, among other cases, has taught us. This is nothing new, but this case once again brings the issue to light and hopefully will remind you to be alert to this in your practice. Be a proactive financial adviser and address these issues now to avoid a losing court battle later. In addition to many other key provisions, the Employee Retirement Income Security Act of 1974 solidly protects the pension rights of spouses. In order for a spouse to forfeit their spousal pension rights under ERISA, they would have to consent to waive those rights. In the 2006 case, Greenebaum Doll & McDonald PLLC v. Sandler, David Sandler, an attorney with a prestigious Louisville, Ky., law firm, attempted to disinherit his wife, Debbie, in favor of his children from a previous marriage by having her sign a prenuptial agreement, but his heirs lost out despite his prenuptial agreement. To make matters worse, the prenuptial agreement was prepared by his firm on a company retirement plan that his firm administered. Mr. Sandler died, and his own prenuptial agreement didn’t work out as planned. Although he thought that he had arranged his affairs so that, after his death, his company retirement plan would go to his children of his first marriage and not his new wife, it didn’t work out that way, because his prenuptial agreement wasn’t valid to eliminate his wife’s interest in his pension plan. His new wife got it all, even though she signed a prenuptial agreement waiving her future pension rights as a spouse. Prenuptial agreements waiving spousal pension rights don’t work, because only a spouse can waive pension rights on a company plan under ERISA. A prenuptial agreement isn’t signed by a spouse. It is signed by a fiancé who isn’t a spouse, even if the agreement is signed one second before the wedding. Only a spouse can waive these rights, not a non-spouse. This is stated clearly in the regulations: §1.401(a)-20, Q & A 28: Reg § 1.401(a)-20. Requirements of qualified joint and survivor annuity and qualified pre-retirement survivor annuity. Q-28. Does consent contained in an antenuptial agreement or similar contract entered into prior to marriage satisfy the consent requirements of sections 401(a)(11) and 417? A-28. No. An agreement entered into prior to marriage does not satisfy the applicable consent requirements, even if the agreement is executed within the applicable election period. You would think that the attorney who administered the plan would know this. This isn’t new law and has been settled in several previous cases. In this case, the Sandlers signed a prenup a short time before their 1995 wedding. Each waived any claims to the other’s pension benefits. After Mr. Sandler died in 2005, his widow and his children from his prior marriage both went to court to claim his pension funds. Mrs. Sandler won, even though she signed a prenuptial agreement that she would waive her rights to these benefits. When planning for these events, every adviser and attorney should keep in mind that a spouse’s rights under ERISA trump any prenuptial agreement. In addition, the court noted that there was “no evidence that David Sandler at any time designated a beneficiary to replace his spouse under the plan.” He never even asked his wife to sign a waiver. Had he done so, and had she refused, there might have been a breach-of-contract claim that could have helped out his children in court, possibly by setting aside Mrs. Sandler’s claim to the pension plan. What should have been done? Although the prenuptial agreement can’t waive spousal-pension rights, it can have a provision stating that as soon as the fiancée becomes a spouse, she will sign a valid spousal waiver, and there should be some consideration for that promise in the agreement, as well. Then, as soon as they are married — right after the wedding ceremony — attorneys should have the spouse sign that waiver in their new capacity as a spouse and fulfill the promise made in the prenuptial agreement. A requirement to execute the spousal waiver after the marriage, including remedies or penalties if this doesn’t occur — if the new spouse won’t waive as they agreed to in the prenup — should be spelled out in the agreement. Ed Slott, a certified public accountant in Rockville Centre, N.Y., has 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 IRA marketplace. He can be reached at irahelp.com. Tales from the IRS I was reading in the morning paper that many illegal immigrants pay U.S. income taxes. Somebody wrote in and suggested that the Internal Revenue Service track them down so the government can deport them. Track them down? What about tracking down people who already are on the federal government’s books? Hard as it may be to believe (then again, maybe it’s not so hard to believe), the IRS maintains a massive inventory of taxpayers it says it can’t find — yet tens of thousands of these “missing” taxpayers currently receive a federal paycheck. True. The “missing” currently are receiving bi-weekly federal paychecks or monthly Social Security checks. The IRS, for some reason, maintains that it has no idea where the recipients of these government checks live. Here’s a high-tech solution: Have the federal payroll office and the Social Security Administration insert a piece of paper in their next mailing saying something like, “If you want to continue receiving your check, call the IRS to talk about your back taxes.” Tales from the IRS, supplied by an insider at the agency, will appear from time to time in InvestmentNews.