As part of the give-and-take negotiation process involved with Marital Settlement Agreements, oftentimes one party will waive his or her right to the proceeds of the other party’s retirement plan assets. What happens, however, when the spouse retaining those assets dies before changing the former spouse as the retirement plan’s designated beneficiary?
While one might think that the assets then pass to the Estate of the deceased spouse, the answer is actually more complicated. In 2009, the Supreme Court of the United States in a case known as Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 555 U.S. 285 (2009), definitively held that the retirement plan administrator must, in accordance with the detailed statutory provisions of the Employee Retirement Income Security Act (“ERISA”) pay the asset proceeds to the designated beneficiary – in accordance with the plan documents. Thus, even if the former spouse waived her rights to the retirement assets as part of the divorce decree, she could still stand to receive those benefits should she remain the designated beneficiary in the plan documents. The Supreme Court even characterized the plan administrator as having done “its statutory ERISA duty by paying the benefits to [the ex-wife] in conformity with the plan documents.”
In such a situation what is the estate to do? Is it without remedy, no matter how unfair the outcome may seem? Actually, the Supreme Court left the question open as to an Estate’s avenue of remedy and, thankfully, the Third Circuit Court of Appeals recently addressed this issue of first impression in the precedential decision of Estate of William E. Kensinger, Jr. v. URL Pharma, Inc.; Adele Kensinger.
In Kensinger, the husband, William, was enrolled in an employee-sponsored deferred savings plan (“401(k) plan”) through his employer. The plan was governed by ERISA. At the time of enrollment, William was married to Adele, whom he designated as the plan’s primary beneficiary. In 2008, the parties divorced and the settlement agreement reached provided that each party waived their respective interests in the other party’s retirement assets. Nine months later, William died before changing Adele as the designated beneficiary on the 401(k) plan. The Estate argued that, because Adele had waived her interest in the asset as part of the settlement agreement, that it was entitled the proceeds of the asset. Adele argued that ERISA trumped her waiver.
Reversing the decision of the United States District Court, the Third Circuit held that the Estate could sue Adele to enforce her waiver and recover the disputed plan proceeds. In so doing, the Court rationalized that the proceeds must first be distributed to Adele to remain consistent with the Supreme Court’s decision in Kennedy, but then the Estate could challenge her right to the funds due to her waiver. In so holding, the Court looked to the decisions of other federal and state courts, also noting that several federal cases have held that a creditor can sue a named beneficiary to recover plan benefits once those benefits have been distributed. Essentially, ERISA’s protections no longer apply once the funds are paid to the beneficiary.
One notable issue raised by Adele, but dismissed by the Court because it was neither raised before the District Court nor mentioned in its opinion, was whether William, despite the divorce decree, perhaps intended to leave Adele as the beneficiary. It is this very type of fact-based question that the Kennedy decision attempts to eliminate. Since the reach of Kennedy, however, essentially stops once the funds are distributed to the designated beneficiary, a protracted litigation could certainly result to determine the decedent’s intent in leaving the forms as is prior to his death. Certainly the settlement agreement would carry great weight due to it having been formalized in writing, and one would think that such a changed expression of intent would similarly be memorialized. The resolution to such a question will ultimately be left to the trier of fact.
The takeaway from this case, however, is that as soon as the divorce is over, people should change their beneficiaries to avoid such problems.