A recent article in IRA expert Ed Slott’s monthly publication points out a major difference between the regulations associated with IRAs and company plans when it comes to a spouse’s rights.
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In this article, Slott uses the example, the Lyon case, in which the court in Wisconsin ruled that because paperwork was missing and the spousal waiver was not properly filed, the state court ruled that the terms of the beneficiary form were not valid. The court ruled that the wife was the only beneficiary. The beneficiaries named on the form are appealing the decision. The spouse did agree to the terms of the beneficiary form, but the court ruled the form did not follow specific required regulations regarding the spousal waiver.
Regulations associated with company plans regarding spouse’s rights are significantly different from the regulations associated with IRA plans. The major difference is that the spouse of the owner of a company plan has protection regarding the inheritance of assets in the company plan that her husband owns that spouses of IRA plans owned by their spouse do not have.
For example, the spouse of an employee with assets in a company plan must waive his or her inheritance rights in order for her husband to be able to name other parties to inherit the assets in the company plan. If the spouse does not waive the right to inherit the assets, then the owner of the assets cannot name other parties as beneficiaries. The regulations regarding IRAs are completely different. In almost every situation, someone who owns an IRA can specify any individuals he or she wishes on the beneficiary form. The account owner is not required to name a spouse as a beneficiary.
In the Lyon case, which involved a company plan, the beneficiary form prepared by the plan’s owner named several grandchildren as the beneficiaries of the company plan. His wife actually did waive her rights to the inheritance. She named her son-in-law as her power of attorney, and he specified on the beneficiary form that the spouse did waive her rights to inherit the assets in the company plan. However, the university that sponsored the ERISA plan, the University of Chicago, and TIAA disagreed with the terms of the beneficiary form. They claimed that the regulations governing the ERISA plan indicated that notarization of the beneficiary form and witnesses were required. Accordingly, they disagreed with the validity of the beneficiary form, and they indicated that the spouse was the legal beneficiary, not the grandchildren. The Wisconsin court agreed with the University and TIAA position.
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The decision is being appealed. The assets have been frozen. The amount of assets in the account at the time of the owner’s death, seven years ago, exceeded $1 million dollars, and the value of the plan is now approximately $2 million.
What is interesting about the case is that, even though the spouse and her legal representative initially agreed with the terms of the beneficiary form, the court indicated that did not matter. The court agreed with the president of the university and TIAA that the regulations that govern company plans required that the beneficiary form did not meet the requirements of a spousal waiver, even though the spouse did agree that she did waive her spousal rights as indicated on the beneficiary form.
Bottom line: It is important that owners of company plans and their legal representatives understand the precise terms of the ERISA regulations that govern spousal waivers. If the beneficiary form was notarized, and witnesses were used, the court would not have been able to rule that the spousal waiver was insufficient. This case emphasizes the significant difference in regulations between company plans and IRA’s regarding spousal rights.
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Elliot Raphaelson welcomes your questions and comments at [email protected].