QDROs (qualified domestic relations orders) only apply to qualified plans. In divorce, IRAs are split according to the divorce agreement, not a QDRO. When an IRA is split in a divorce, transferring the portion of the IRA that goes to the former spouse via a direct trustee-to-trustee transfer to an IRA in the name of the former spouse is the best way to move the funds.
A spousal waiver does not apply to IRAs; it only applies to qualified plans.
A non-spouse cannot do a valid spousal waiver. It cannot be done in a prenuptial agreement by a spouse-to-be (a fiancé).
- Court Case – October 24, 2006
Greenebaum Doll & McDonald PLLC v. Sandler
No. CIV.A. 3:05CV-754-H. , 2006 WL 3071253 , 39 EBC 1550
Court: United States District Court , W.D. Kentucky.
- Date: 10/24/2006
The Story of Debbie and David Sandler
Attorney’s heirs lose out despite his prenuptial agreement
A member of a prominent law firm dies and his prenuptial agreement loses out to ERISA. His spouse gets all, even though she signed a prenuptial agreement waiving her future pension rights as a spouse.
The Rule:
Prenuptial agreements waiving spousal pension rights don’t work.
Why?
It’s obvious. Only a spouse can waive pension rights on a company plan under ERISA. A prenuptial agreement is not signed by a spouse. It is signed by a fiancé who is not a spouse, even if the agreement is signed one second before the wedding.
This is clearly stated in the Regulations:§1.401(a)-20, Q & A 28:
Reg § 1.401(a)-20. Requirements of qualified joint and survivor annuity and qualified preretirement 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.
In this case, David and Debbie Sandler married in 1995, but signed a prenuptial agreement (also known in legal parlance as an antenuptial agreement) a short time before the wedding. Each spouse waived any claims to the other spouse’s pension benefits. Mr. Sandler had children from a prior marriage and he wanted to make sure that they would receive his pension benefits (instead of his new spouse) after his death. He died in 2005.
After his death, Mrs. Sandler and Mr. Sandler’s two 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.
Does this make her a liar?
Yes, but she wins anyway because a spouse’s rights under ERISA trump any prenuptial agreement since that was not signed by a spouse and everyadvisor and attorney should know that when planning for these events. She may be a liar, but she keeps the cash and now she is a very rich liar.
In addition the Court noted that there was “no evidence that David Sandlerat any time designated a beneficiary to replace his spouse under the Plan.” He never even asked his wife to sign a waiver. Had he at least asked and if she refused there might have been a breach of contract claim that could have helped his children out in court in possibly setting aside Mrs. Sandler’sclaim to the pension plan.
The Ruling from the Court:
IT IS HEREBY ORDERED that the motion of Debbie D. Sandler is SUSTAINED and she is entitled to the proceeds of the David Sandler Plan proceeds as its beneficiary under that Plan.
IT IS FURTHER ORDERED that all other motions are MOOT.
This is a final order and there is no just reason for delay.
What should have been done?
While the prenuptial agreement cannot waive spousal pension rights, it can have a provision stating that as soon as the fiancé becomes a spouse, she will sign a validspousal waiver and there should be some consideration for that promise in the agreement as well.
Then, as soon as they are declared married (I mean right at the wedding ceremony!) attorneys should be standing by so that the spouse can sign that waiver in her new capacity as a spouse and fulfill the promise she made in the prenuptial agreement. A requirement to execute the spousal waiver after the marriage, including remedies or penalties if this does not occur (if the new spouse won’t waive as she agreed to in the prenuptial) should be spelled out in the prenuptial.
The Court noted that Mr. Sandler did not at any time designate a plan beneficiary to replace his spouse, so the plan benefits went to the spouse. Mr. Sandler’s children lost the pension benefits that Mr. Sandler thought would go to them.
IRS Notice 97-10 provides samples of spousal consent forms to be used to waive spousal pension rights.
The Court did not cite other cases on this because the law was clear, but this was the result in a high profile 1992 case a few years before the Sandlers were married (Hurwitz, Peter v. Joan Sher, (1992, CA2) 982 F2d 778 , 16 EBC 1528 , 93-1 USTC ¶50282 , cert den (1993, S Ct) 508 US 912 , 124 LEd 2d).
One thing that can be looked at is to see if a plan has a provision that if a spouse was married to the plan participant for less than a year, she would not be entitled to any spousal survivorship benefits. You won’t find this provision in many plans but every plan should have it. If the participant wants to override this, he can still name his new spouse as beneficiary. But if the plan participant dies early, this provision would avoid an unintended result if the participant died within a year of being married without having executed a spousal waiver. This will help make sure that a promise in a prenuptial agreement to waive benefits upon becoming a spouse will be upheld.
It seems that many of the cases in this area involve an early death, with a new spouse walking off with plan benefits.
This is what happened in Hurwitz, Peter v. Joan Sher cited above. A prenuptial agreement was signed stating that the future spouse would waive pension benefits upon marriage so that any pension benefits would go to Hurwitz’s son from a prior marriage. She did not do that and Hurwitz died a few months after the marriage. When Hurwitz’s son came collect, he found that the spouse inherited the pension plan and not him. He went to Court and lost since spousal pension rights cannot be signed away in a prenuptial agreement.
Company plan beneficiary form trumps the divorce decree
Supreme Court Rules in Favor of Ex-Spouse
Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, (No. 07-636, Decided January 26, 2009)
