Brown & Associates - Attorneys & Counselors at Law, P.L.L.C.

ESTATE PLANNING IMPORTANT FOR DIVORCING COUPLES
(5/13/01)

On March 21, 2001, the United States Supreme Court again pointed out the importance of estate planning, especially as it relates to divorced parents.

The case in question involved David and Donna Egelhoff and occurred in the State of Washington. David Egelhoff died in a car accident some two months after his divorce was final. He died intestate-that is, without a Will. At the time of his death, his employer provided his family with a life insurance policy and a pension plan, both of which listed his former wife as beneficiary. The pension plan was subject to and governed by a federal statute, The Employee Retirement Income Security Act of 1974 (ERISA).

The law in the State of Washington was relatively well settled. Basically, it said that if you died without a Will and without having named a "qualified" named beneficiary, the proceeds of a pension plan would be paid to the decedent's living heirs, which in this case, would be the Egelhoff children.

When their father died, David's children sued in state court claiming that there was not a qualified named beneficiary because the policies listed "Donna R. Egelhoff, wife" as the beneficiary, and at the time of David's death, Donna was no longer David's wife. Therefore, they argued that they, not Donna Egelhoff, should receive the proceeds of the father's retirement plan as his only living heirs.

The children lost at the trial court level, but prevailed in both the Washington Court of Appeals and the Washington Supreme Court, which held that the state statute was not pre-empted by the ERISA federal statute.

Unfortunately for the children, the United State Supreme Court did not agree with the Washington Supreme Court. Justice Clarence Thomas, writing for the majority, said that ERISA superceded state laws relating to employee benefit plans. Justice Thomas found that the state's statute "directly conflicts with ERISA's requirements that plans be administered, and benefits be paid, in accordance with plan documents."

Justice Scalia did not join with the majority, but agreed with the result. In his concurring opinion, Justice Scalia, joined by Justice Ginsberg, held that ordinary preemption rules of jurisprudence dictated that the federal rule control.

This decision created more questions then it answered. For example, since individual retirement accounts (IRAs) are not "qualified plans," will the same rules apply to them? If not, why not? No one knows the answer, but a 1997 case, Boggs v. Boggs, may shed some light on the situation. In that case, the Supreme Court dealt with an IRA that had been funded through a rollover from a qualified plan and the Supreme Court held that the ERISA rules applied.

A more basic question is what happens if someone succeeds to an interest in a retirement account simply because they are named in a Will or Trust, but not in the plan document itself? And what if the beneficiary isn't named in the Will, Trust, or plan document, but acquires an interest under the rules of intestacy, such as in the current case?

The decision also appears to fly in the face of the newly Proposed Regulations.Proposed Regulations Section 1.401 (a)(9)4 Q&A-4 recognizes the right of a beneficiary to disclaim his or her interest in a qualified plan so it can pass to the next heir in the chain of succession.

This topic is too complex for a weekly newspaper article, but this decision could turn your estate plan topsy-turvy. If you planned on one heir receiving your retirement plan and it goes to someone else, you will have over funded one family member and under funded another.

This decision tells us we cannot rely on well established principals of local law when it comes to beneficiary designations. The plan administrator must pay the benefits to the person named in the plan document, even if the result is different from what would occur under state law.

"What can we do to avoid this problem?" David could have avoided the problem if he had been more careful in identifying his beneficiary. If he had used the word "wife" instead of "Donna R. Egelhoff wife", the children would have received the benefits. Why? Because David was not married when he died.

On the other hand, if he had merely listed "Donna R. Egelhoff", his ex-wife would have received the benefits regardless of whether she was still married to him because the designation would have been clear on its face.

You need to realize even though Wills and trusts are important estate planning documents, they are not the only estate planning documents with which you need to be concerned. Many assets are passed on by means of other documents. If you have a "pay on death" bank account, the proceeds will be paid to the person named on the bank account. If you have a life insurance policy, the insurance company will pay the proceeds to the beneficiary listed on the policy, not the beneficiary listed in your Will. If you own property in joint tenancy with right of survivorship, the property will pass to the surviving tenant, and not in accordance with your trust.

If your want your estate to pass to the correct beneficiaries, it is important to sit down with a qualified estate planner and carefully evaluate every asset you own. Make sure you have clearly and legally identified the beneficiary to whom it should pass. Even more important, if you are at a major transition point in your life, be it divorce, the loss of a loved one, marriage, retirement, or relocation to another city or state, be sure to review your estate planning documents to ensure that they meet your needs.

If David had done so, his children would be a lot happier about now.

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