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Retirement plan beneficiary designations shouldn’t be one and done

What did Amy Winehouse, Jimi Hendrix, Heath Ledger, and Whitney Houston have in common?

No. not just being in the celebrity spotlight, but rather, estate planning done wrong or not at all.

You can add one more celebrity to the list who Darla Mercado writes about in her InvestmentNews article, He needed a script: Actor Philip Seymour Hoffman left a legal mess behind.

Mr. Hoffman, who died February 2, 2014, did have a will that was signed on October 7, 2004. But in the almost 10 years that followed, it became out-of-date because of changing circumstances.

For retirement plan participants changing, or for that matter, changed circumstances, can also affect those beneficiary designations.

There is, of course, ERISA’s spousal consent rule for beneficiary designation which simply stated provides

  • In defined benefit plans and some defined contribution plans, the death benefit for a married participant must be in the form of a spousal annuity unless spousal consent is obtained in another form, a lump sum if it’s available.
  • The spousal consent rule also applies to most defined contributions plans, such as 401(k) and profit sharing. The surviving spouse must be the sole and direct beneficiary of the participant unless he or she provides spousal consent subject to special rules.

But sometimes changing circumstances intervene to invoke the Law of Unintended Consequences.

Those changed circumstances could be a divorce, remarriage, birth or death of a loved one,  or even a pre-nuptial agreement. Changes in the law can also impact beneficiary designations such as the recent Supreme Court’s Windsor decision.

This decision and subsequent Internal Revenue Service and Department of Labor guidance had the immediate effect of granting same-sex couples who are married under state law the same federal rights, protections, and responsibilities that are afforded to married opposite-sex couples under the Internal Revenue Code and ERISA.

In plain English, it means the Windsor decision affect those situations in which a “spouse” could be involved such as lump sum death benefits, annuity benefits, and spousal consents.

One final note: retirement plan beneficiary designations are not governed by a will.  Retirement plan participants should consult with an experienced attorney about completing beneficiary designation forms as part of an overall estate plan, and then reviewing them on a regular basis. 


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