Simple Mistakes Can Cost Beneficiaries Everything

Beneficiary designation forms are an often overlooked area of estate planning that can have dire consequences if not taken care of. For example, divorce is already an unpleasant event but imagine that your ex-spouse gets the proceeds of your life insurance policy and/or retirement accounts because you forgot to update your beneficiary designation forms. In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, Kari Kennedy was the administrator of her father’s estate and tried to recover $402,000 that was paid to her father’s ex-spouse. As part of the divorce agreement, the soon to be ex-wife had given up her rights to Mr. Kennedy’s pension and other work-related benefits.

However, Mr. Kennedy failed to remove his ex-wife as the beneficiary of his investment plan assets and replace it with Kari’s name. Following his death, the funds went to his ex-spouse, not Kari as he had intended.

The case made it all the way to the Supreme Court but, unfortunately, Kari was not deemed the beneficiary because, under ERISA, the beneficiary designation form trumps a divorce decree. The Court made it clear that a former spouse can give up the right to retirement benefits as part of a divorce decree but the specific terms of an ERISA governed plan ultimately control what happens to the plan assets.

This is an extreme case but it illustrates the dire consequence of failing to review and update beneficiary designation forms whenever a life changing event occurs such as death, divorce, marriage or birth. A beneficiary review is an important part of your financial review process that your advisor can help guide you through.