Are You Leaving Money to the Wrong Person?

“The Devil is in the details” is a cliche, honored by time, and cautions us that it is the fine print or the little things that probably will cause us problems. There is a recent legal case, Cajun Industries LLC v. Robert Kidder, et al, which illustrates this fact and provides ample warning which could directly affect every participant in a 401(k) plan or other qualified plan subject to the Employees Retirement Income Security Act(ERISA).

Everyone who has read my work knows that it is important to review periodically your will and the beneficiary designations that are on any life insurance products, IRAs and retirement plans. You probably do not want your ex-spouse to receive the proceeds of your life insurance policy or retirement assets and yet that is a distinct possibility if you do not make the proactive change. However, as illustrated by the Cajun Industries case, having a complete and accurate beneficiary designation form on file may not be good enough.

The facts of the case are relatively simple and straightforward. Leonard Kidder was a former employee of Cajun Industries LLC and was a participant in that company’s 401(k) plan. Mr. Kidder was a widower and upon the death of his wife, he did update his beneficiary designation form to reflect that his three children should receive any payout. In late 2008, Leonard took a new bride, Beth Kidder and six weeks later he died.

The children, who were named beneficiaries expected to inherit the balance of the 401(k). However, Beth Kidder also claimed the right to the balances and filed a lawsuit against Cajun Industries demanding payment of the balance in the 401(k) plan.

If you are thinking that the kids got the money, guess again. The court had little difficulty in reaching the decision that the legal beneficiary was the spouse, even if she was a spouse for only six weeks and that the deceased had expressly named his children as heirs. The court relied on the plan documents, which in a very clear and unambiguous fashion stated that if a spouse is not the beneficiary, then a spousal consent waiver must be obtained and filed with the plan administrator. If it is not filed then the spouse is the beneficiary. The court also acknowledged that ERISA, which covers virtually all 401(k) plans may waive, but is not required to waive, the spousal consent requirements when the marriage is less than one year old.

There are several lessons that we can learn from this case. First, it is crucial that you understand and follow the requirements of any company sponsored retirement plan. You should ask for and review the Summary Plan document periodically and especially if there is any change in your life’s circumstances.

Secondly, realize that the beneficiary designations and options, which are available in a company-sponsored plan, may not be as flexible as those available in an IRA. Most states do not require a spouse to consent to their not being named a beneficiary on an IRA.

Add this to the list of reasons why it is usually better to roll money out of your 401(k) and into an IRA when you leave a job.

More from this contributor:
Roth or Traditional IRA: Is One Better?
Getting Divorced? Know the Difference Between Alimony and Child Support
Getting Divorced? Making the Right Decisions is Crucial