Retirement Plan Tragedy

401(k), estate planning

When is the last time you review your 401(k) or 401(a) beneficiary designation?  Most likely it was when you joined the plan.  For many individuals this is something that is often stuffed into the memory storage locker to be buried behind all of the “honey do lists”, work related projects and just about everything else that comes up in our daily lives.   Unless you are forced to dig through your locker to retrieve this information, it is often forgotten and may ultimately end up on an A&E episode of “Storage Wars”. However, rather than Darrell and Dave fighting over your 401(k) after your passing, it might be those who you leave behind.

In a recent case, Cajun Industries, LLC vs. Robert Kidder, et al., the deceased father, Leonard Kidder, had his first wife as his 401(k) beneficiary. After she passed away Mr. Kidder designated his three children as beneficiaries. Simple enough – if your wife is deceased then your children become your beneficiaries.  Not so fast.  If you find new love and companionship and decide to remarry, the rules change.  Mr. Kidder found new love and remarried but unfortunately for him, he died six into his new marriage (maybe his heart could not keep up with his younger bride – lesson to men who seek younger wives – may lead to an early grave).

Rule Change
The children thought they were entitled to their father’s 401(k) per his beneficiary designation.  Unfortunately for the children, their father was not aware of the Employee Retirement Income Security Act, “ERISA”, a federal law which governs all retirement plans (note, this does not apply to IRAs).  Under ERISA, the new Mrs. Kidder, surviving spouse, is entitled to her late husband’s entire 401(k) despite his beneficiary designation.  To the dismay of her assuredly loving and doting stepchildren, she claimed it.  Why not, after a lengthy marriage of 6 weeks she should be entitled to something.  

This is why I tell those people who prefer the “lone wolf” do-it-yourself legal work with the assistance of Legal Doom and others that you don’t know what you don’t know.  ERISA required Mr. Kidder to fill out a new beneficiary form after he remarried and to obtain the consent of his new wife.  Because his wife had not consented to his designation in favor of his children, ERISA required the account to be distributed to his wife. The children were left with nothing.

Simple Solutions
There were two other potential solutions that would have allowed the funds in the 401(k) account to go to Mr. Kidder’s children. Prior to getting married, Mr. Kidder could have asked his wife to sign a prenuptial agreement wherein she agreed to sign a waiver of his 401(k) plan. Alternatively, before he married, Mr. Kidder could have rolled his 401(k) account to an IRA and then designated his children as beneficiaries of his IRA. The rules requiring a spousal waiver to a beneficiary designation do not apply to IRAs.

Don’t Kid yourself into believing entity planning is easy and does not require the assistance of qualified professionals. It is sometimes the small mistakes that result in disastrous consequences.

 

0 comments On Retirement Plan Tragedy

  • I really appreciate this article and the case it exposed. I found it very neat and explanatory. Your story has thrown light on my case.

    I was married to my late wife more than 10 years before she passed away. She was outlived by two adult children. She had an account with Fidelity Investment. My wife died without a will. However she designated her two children as her primary beneficiaries thus exempting me from any benefits at all.
    I do not really know whether my late wife was under and IRA or and ERISA. I only know she was a former worker at the UC San Francisco, CA.
    As I have it understood, Fidelity Retirement Plan Beneficiary Designation (Section 1) puts forth that if a customer designates a beneficiary or beneficiaries other than the spouse, that is a non-spousal designation, then he/she has to produce a LETTER OF CONSENT OR SPOUSAL CONSENT signed by the spouse.
    This is clearly stated on this form which every customer has to fill out upon applying for Fidelity Investment account.
    I filed a claim to Fidelity only to hear from them that a letter of consent was not necessary so I did not qualify to get any benefits as a surviving spouse.
    My late wife’s children have already been distributed the benefits according to what was stated by their late mother in her Fidelity Retirement Plan Beneficiary Designation.
    I would like to get suggestions or assistance in this regard which would help me determine whether Fidelity Investment violated its own regulations against my spousal rights.

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