We knew it was time to take action when the last file drawer refused to close. This summer our practice completed a long-postponed paperless conversion, moving everything we had stored on paper up to the cloud. Now, as we wield greater command over documents and celebrate an apparent triumph of the digital age, is there reason to fear Old Paper’s revenge?
The case of The Estate of Kennedy v. DuPont, argued before the US Supreme Court 12 years ago this month, provides a cautionary reminder of the risk from Old Paper lurking in forgotten files.
William Kennedy was a DuPont employee who participated in his company’s retirement savings plan. When he and his wife Liv were married, William filed a form with the administrator of the DuPont employee retirement plan naming Liv as the primary (and only) beneficiary of his plan savings. When they divorced 22 years later, Liv was divested of her interest in plan assets by their divorce decree. However, William never updated the beneficiary designation form filed with the plan administrator.
At William’s passing, the plan administrator distributed William’s plan savings to Liv according to the documents on file. The executrix of William’s estate, his daughter Kari, filed suit to compel the administrator to transfer assets to William’s estate, arguing that Liv had waived her right to claim the assets in the divorce decree. Kari’s case made its way to the US Supreme Court, which held that by transferring William’s plan assets to Liv, the administrator had correctly followed its ERISA duty according to procedures established in plan documents.
The Kennedy case reminds us how a dusty, dog-eared beneficiary form hiding in an overlooked file cabinet can unravel an estate plan. When updating beneficiaries following divorce, here are some places that Old Paper can hide:
- Beneficiaries for employer-sponsored retirement plans: As in the Kennedy case, beneficiary forms for employer plans are filed with the plan administrator. Participants should contact their plan administrator to request new forms for updates following divorce.
- Individual Retirement Arrangements (IRAs) and their variants: Beneficiary forms for Traditional, SEP, SIMPLE, Rollover and Roth IRA are filed with a plan custodian. A representative from the financial firm servicing the client’s accounts will be able to provide forms to update the custodian’s records.
- Non-qualified Transfer on Death Designations: Beneficiaries named in TOD agreements for probate assets may not appear on client statements. A good practice is to request copies of all designations from the financial firm servicing the accounts and update as appropriate.
- Successors named for minor accounts, including UTMA and College Savings Plans: It’s common to name a spouse as successor for a minor’s uniform trust account or college savings plan. While a separation agreement may protect the minor beneficiary’s interests, it’s important to check that plan custodians also make any required changes for named successors.
- Life Insurance policy beneficiaries: Term life policies without a cash value may escape the eye if they’re not part of an asset division agreement. A good practice is to review all insurance policies to make sure that the beneficiary designations reflect the owner’s wishes.
Developing a process for reviewing and updating beneficiaries is critical for helping protect clients from Old Paper. We create a complete household balance sheet including the titling, successors and beneficiaries for all accounts. If changes are needed, we provide a checklist of to-do items and follow up on status at review meetings. We also keep beneficiary designations as a standing agenda item for our annual client review meetings, documenting any required changes and assigning responsibility for making them. Finally, we’ve begun using interactive illustration tools to simulate the flow of assets during estate settlement. The pictures on screen can help identify potential problems and help our clients take proactive steps to address them.
A well-documented, thorough review of assets and contingencies is perhaps the strongest defense against Old Paper. And a proactive approach that leaves nothing to chance is key. As aspiring reporters are taught in journalism school, “If your own mother says she loves you, check it out.” If your client says their beneficiary designations are current, best to check that out, too.