You Don’t Have to Name Your Spouse as Your IRA Beneficiary

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You don’t have to name your spouse as your IRA beneficiary, as you do with a qualified plan. State law may provide a right of election, though, if you disinherit your spouse (IRS notice 97-10 provides sample spousal waiver language from plans).

Spousal Rights Court Cases:

Do proactive planning to avoid lawsuits like these.

Cajun Industries, LLC vs. Robert Kidder
– April 26,2011

401(k) Beneficiary Form is Trumped by Remarriage;Disinheriting Children
(Cajun Industries, LLC vs. Robert Kidder, et al. United States District Court; Middle District of Louisiana, No. 09-267-BAJ-SCR – April 26, 2011)

Normally we say that the beneficiary form trumps all, and that’s usually the case. But now, in a new case, the beneficiary form was trumped…by ERISA rules.
In a recent case, the U.S. District Court for the Middle District of Louisiana ruled that despite having previously named his three children as beneficiaries of his 401(k) plan, a deceased plan participant’s 401(k) balance would pass to his new wife. The Court determined that under the terms of the participant’s plan, a spouse’s right to plan assets is immediately vested upon marriage and, since no spousal waiver had been obtained, the default plan beneficiary was the participant’s spouse, even though she was not the named beneficiary. The spouse got the 401(k) after only six weeks of marriage, and the children, who were the intended beneficiaries, were disinherited. The fatal flaw was not obtaining a spousal waiver after getting remarried.

Cajun Industries, LLC vs. Robert Kidder – April 26, 2011)

Summary of Key Points
  • After the death of a 401(k) plan participant, the plan beneficiary form was overridden by the spouse’s ERISA rights. The children were disinherited, even though they were named on the plan beneficiary form.
  • Leonard Kidder was a participant in a 401(k) plan. After his wife Betty died, he updated his beneficiary form naming his three children as beneficiaries. He subsequently married Beth Bennet Kidder. Six weeks after their marriage, Leonard Kidder died, having never obtained a waiver of spousal rights from Beth Bennet Kidder.
  • Kidder’s children claimed that as the named beneficiaries on the plan’s beneficiary form, they were entitled to the plan funds.
  • Beth won. The Court agreed that the terms of Leonard Kidder’s plan called for a spouse to have an immediate vested interest in the plan assets. They rejected the Kidder children’s argument that a waiver of spousal rights should not be required for a spouse of less than one year.

From Section 6.13 of the Cajun Industries, LLC 401(k) Plan
“Furthermore, the participant’s spouse will be the Beneficiary of the Participant’s entire Vested Interest in the Plan unless an election is made to waive the spouse as a beneficiary.”

Charles Schwab & Company v. Chandler, No. 07-15261, D.C. No.
CV-06-00119-FJM (CA 9 – 1/22/2010)

ERISA Spousal Inheritance Rights do Not Carry Over to IRAs

The Court ruled that the IRA goes to the named beneficiaries and not to the spouse, even though some of the IRA funds came from a company plan subject to ERISA.

Spousal rights under ERISA do NOT apply to IRAs

Under ERISA (Employee Retirement Income Security Act of 1974; later amended by the Employee Retirement Income Security Act of 1984 which added spousal benefits), the surviving spouse of certain plan participants must receive a qualified survivor annuity upon the death of the plan participant. In other words, the surviving spouse must be the beneficiary of the ERISA plan (unless the spouse waives that right by satisfying the written spousal consent requirements). But these spousal rights provisions only apply to certain ERISA-qualified plans and NOT to an IRA. A surviving spouse has no such ERISA-type spousal statutory rights to the deceased spouse’s IRA.

Wayne Wilson died unexpectedly on August 9, 2005 at age 65 in a flash flood.

In 1994, after leaving the company, he rolled his Siemens/GTE 401(k) funds to an IRA with Smith Barney. Between 1995 and 1999 he also rolled other funds into the Smith Barney IRA.

Wilson had been living with Katherine Chandler in 1990 and then in December 2000, they married, well after the funds were rolled over to his IRA. In 2002, Wilson transferred about half of the funds in his Smith Barney IRA to an IRA with Schwab. He told Schwab that he was divorced (even though he was married) and named his four children (all adults) from a previous marriage as the beneficiaries on his Schwab IRA.

After Wilson died, his wife Katherine Chandler claimed that she was entitled to the funds in the Schwab IRA, even though she was not the named beneficiary on the IRA beneficiary form (the four children were). She claimed that as the surviving spouse, under ERISA, and under the tax code, she was entitled to the IRA funds. The children contested her claim.

Chandler claimed that ERISA applied because the IRA funds came from an ERISA- qualified plan. Chandler argued that only self-funded IRAs are exempt from spousal rights, but IRA funds that came from a plan are subject to ERISA spousal rights.

The Court rejected her claim stating that no such language to that effect exists in the law. Once the funds leave the plan, they are no longer ERISA funds. ERISA no longer applied once Wilson ended his plan participation and transferred the funds to his IRA. In addition, the Court found it significant that Wilson left the company and rolled the funds over to his IRA well before he married Katherine Chandler.

The Court ruled that the funds go to the children who were named on the IRA beneficiary form.

“…IRAs are specifically excluded from ERISA’s coverage.”

“ …we reject Chandler’s claims that she is entitled to automatic surviving spouse rights in her husband’s Schwab IRA under either ERISA or the Internal Revenue Code, and we affirm the district court’s grant of summary judgment to the Beneficiaries.”

For clients contemplating second marriages, rolling ERISA plan funds to IRAs before remarriage can be an effective strategy when someone other than the new spouse is a desired beneficiary.

Naming someone other than a spouse as the beneficiary of certain 401(k) or other ERISA plans is a two step process:

1 – A waiver of spousal rights must be obtained, AND

2 – the plan’s beneficiary form must be updated naming the intended non- spouse beneficiaries.

Both steps are essential!

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