Divorce and Death—dividing the Nest Egg
Guess Who’s Not Coming to Dinner
Continuing on in the discussion of the pitfalls of ERISA when dividing retirement benefits during a divorce in Mississippi, this next case illustrates the importance of complying with ERISA as well as changing the beneficiary forms following a divorce.
In Kennedy v. DuPont, Mr. Kennedy was an employee of DuPont and participated in their savings and investment plan (SIP) that was an ERISA benefit plan. In 1971, Mr. Kennedy married and three years later signed a beneficiary designation identifying his new wife, Liv Kennedy, as the sole beneficiary of the SIP plan. Twenty years later, the couple divorced. As part of the divorce, the ex-wife agreed to relinquish all rights to husband’s pension benefits with DuPont. Although a QDRO was submitted and approved, the QDRO did not address the benefits in the husband’s SIP account nor did the husband ever change the beneficiary designation for the SIP account. It only addressed the other pension benefits Mr. Kennedy had at DuPont.
In 1998, Mr. Kennedy retired from DuPont and later died in 2001. His daughter was appointed administrator of his estate. She sent a letter to DuPont requesting the Estate be paid the funds in the SIP. DuPont refused, stating that the beneficiary designation identified the ex-wife as the beneficiary. She also asked the ex-wife (her Mom) to relinquish her rights to the account and she refused. In fact, ex-wife asked DuPont to pay up and they sent the ex-wife the $400,000.00. Daughter, on behalf of the estate, brought a lawsuit.
The federal district court held that the Estate was entitled to the SIP benefits wrongfully paid to the ex-wife. The case was appealed to the Fifth Circuit. In reversing the district court’s decision, it said,
“In the marital-dissolution context, the QDRO provisions supply the sole exception to the anti-alienation provision; they exempt a state domestic-relations order determined to be a QDRO, under the standards set forth in ERISA.”
The anti-alienation provision of ERISA simply means that state laws cannot preempt ERISA. In essence, federal law trumps state law. The only exception is a valid QDRO. That was the issue in this case—was there a valid QDRO relinquishing the rights of the ex-wife to the SIP account given the beneficiary form was never changed. The Fifth Circuit held there was not. As such, DuPont was correct in paying the money to the ex-wife who was the designated beneficiary of the account despite the fact she relinquished those rights in a state court divorce decree. Although the ex-wife gave up her rights to the SIP account in the divorce decree, the parties never submitted a valid QDRO stating this fact. Thus, when the employee died, the plan administrator for the SIP account looked to the beneficiary designation and paid as required.
Lesson learned—follow ERISA guidelines. Something tells me mother and daughter will not be getting together for Christmas. That is the sad part of the story—a family divided over money. This dispute could have been avoided with a properly drafted QDRO while also ensuring the beneficiary form was changed following the divorce. The U.S. Supreme Court has agreed to hear this case on appeal, so we might get some new law from them. We will have to wait and see. Until then, beware.
In my next post on this subject, I will discuss what happens when parties can not agree how to divide retirement benefits in a divorce in Mississippi.
