An article in today’s Wall Street Journal and a recent Florida Supreme Court decision are emphatic reminders of why you should periodically review your beneficiary designations for retirement plans and life insurance policies.  The Wall Street Journal article is: “Family Feuds: The Battles Over Retirement Accounts.”  The Florida Supreme Court case is: Crawford vs. Barker, SC 09-1969, (Fla. June 9, 2011).

The Family Feuds article discusses, with actual case histories, the many problems that can go wrong when circumstances vary at your death from what you thought they would be.  In short, your 401(k) and IRA can end up in the hands of someone other than the person(s) you want to receive those funds.  The article lists a number of “rules” that typically apply to 401(k) accounts and IRAs.

Rule No. 1: With 401(k)s, your spouse is the presumed beneficiary of your account upon your death—regardless of who is listed on the beneficiary form—unless he or she previously consented to your naming someone else beneficiary. These plans are governed by the federal Employee Retirement Income Security Act, or Erisa. Under this law, plans can provide for those spousal rights to kick in immediately, or no later than a year after the marriage. This general rule cannot easily be circumvented with a prenuptial agreement. Only a spouse can waive the right to 401(k)-plan assets—those who are engaged cannot.

Rule No. 2: If you are single when you die, your 401(k) assets pass to the person designated on your beneficiary form—regardless of what your will says or what other agreements you made before your death. The U.S. Supreme Court has said so.

Rule No. 3: With IRAs, which are subject to state law, you generally can name anyone you like as the beneficiary, with or without your spouse’s consent. (Certain restrictions apply in community-property states.) 

Rule No. 4: Workers generally don’t need a spouse’s consent to cash out a 401(k) or roll it to an IRA when they change jobs or retire. Although employers may impose such a rule, the vast majority do not, as there is no federal law requiring them to do so, says Amy Matsui, senior counsel at the National Women’s Law Center, which advocates improving spousal protections for 401(k)s and IRAs.

The article provides specific examples of how the application of each of the rules can create unexpected results.

The Florida Supreme Court case provides a vivid, and painful, example of just how wrong the end result can be – and there are virtually no exceptions to the application of the above stated rules.

In the Crawford vs. Barker case, Manual Crawford and Linda Crawford were married.  Manual had a deferred compensation (retirement) account – similar to a 401(k), and named his wife, Linda, as the beneficiary. Later Manual and Linda divorced.  In the marital settlement agreement that was adopted by the divorce court, and made a part of the final judgment entered by the divorce court, Manual retained his interest in the deferred compensation account.

About one year after the divorce was final, Manual died.  He never changed the beneficiary designation on the deferred compensation account so that Linda remained the named beneficiary.  Manual’s daughter, Jannie Barker, filed an action seeking to require the funds in the deferred compensation account be paid to Manual’s estate – in accordance with the provisions of the final judgment dissolving his marriage to Linda.  Linda’s argument was that Manual had more than a year to change the beneficiary designation and never did so the account belonged to her as the named beneficiary, despite the provisions of the divorce judgment specifically awarding the account to Manual.

The Florida Supreme Court ruled that the beneficiary designation prevailed and that the funds should go to Linda – not to Manual’s estate.

Right result?  Who knows.  Manual has not spoken about the matter since his death.  Perhaps it was what he wanted, but not according to his daughter, and not according to the facts surrounding the divorce proceeding.

The lesson to be learned from Crawford vs. Barker is that each and every one of us should carefully review the beneficiary designations we have on life insurance policies and retirement plans when ever there is a change in our life circumstances.

One way to avoid the problems and uncertainties of beneficiary designations is through the use of a revocable living trust.  Such a trust allows for all beneficiary designations to be the trust.  The terms of the trust then govern what happens with your accounts in the event circumstances are different at your death than you “plan” them to be.  Through the directions and instructions you leave in the trust you have the ability to re-direct funds if your chosen beneficiary is deceased, or incapacitated.

For most everyone, the primary objective is to see that your funds end up benefiting the people you want, and (usually) certainly not your ex-spouse!

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