Consider the case of a man who named his wife as the beneficiary of his union pension but never told anyone that he had a first wife whom he never divorced.
Here's the question: Which wife gets the money?
Before we get to the answer, let's look at what happened.
Wayne Lee was a member of the International Brotherhood of Electrical Workers and contributed to its pension fund. He married Cleta in Washington state in 1979.
Around 1993, Wayne moved to Mississippi without Cleta. He found a job, and he also found Lois, whom he married in 1995. Wayne retired in 1997 and applied for his pension fund benefits. He identified himself as married and named Lois as his spouse. He made certain pension payment elections and attached his Mississippi marriage certificate “memorializing” his marriage to Lois. On the beneficiary form Wayne listed Lois as the beneficiary of “any benefits which may be payable from the IBEW Pacific Coast Pension Fund as the result of [his] death.”
Wayne died in 2007 and Lois began receiving her monthly benefits Feb. 1. Somehow, his first wife found out and applied for survivor benefits from the pension fund later that month, attaching her 1979 marriage certificate and stating that she and Wayne had never divorced.
The pension fund didn't know what to do, so it filed an interpleader action in the U.S. District Court for the Eastern District of Tennessee, where Lois resided.
PLAN TAKES ISSUE TO COURT
An interpleader action allows a third party with custody of the funds (in this case, the IBEW and the pension fund) to turn the problem over to a court when faced with a legal dilemma, in which giving property (in this case, funds from the pension) to either of the parties could lead to a lawsuit. Both wives would be bound by the court ruling.
In deciding which wife gets the money, the district court relied on the beneficiary form and awarded the funds to Lois, since Wayne identified Lois as both his spouse and his beneficiary in his pension application. Not so fast, said Cleta. She appealed the ruling to the 6th U.S. Circuit Court of Appeals, which reversed the lower court's decision and said that Cleta is the real beneficiary if she can prove she was never divorced. The appeals court sent the case back to the district court to confirm.
The appeals court based its ruling on that fact that the pension plan came under the Employee Retirement Income Security Act of 1974 and that ERISA “supplies the rule of law” for determining a plan beneficiary.
The court determined that under ERISA, Wayne's benefits are to be paid to his legal spouse. The plan documents define a spouse as “a person to whom a participant is legally married.” That seems clear enough. The court goes on to say that the legally married spouse is the beneficiary unless she waives those benefits in writing. Cleta did not do that.
The appeals court reversed the decision and sent the case back to the district court to determine which wife is the actual surviving spouse, and in turn, the legal beneficiary of Mr. Lee's plan funds. The district court is currently investigating the case, and it seems likely that it will find that Cleta is the surviving spouse and entitled to the plan benefits.
While this may be an odd case, similar things could happen to you.
WHAT CAN YOU DO?
What can an adviser do when a client tells you that he or she is married (or not), but that turns out not to be the case? Similarly, what if the person you believe to be your client's husband or wife is not the legal spouse? How would you know?
All you can do is ask and document the responses.
Always ask for and look at beneficiary forms and any spousal waivers for all plans, then document the responses. Get copies of the most current versions of these documents. Don't leave any room for error.
Ask the clients point-blank at your intake meeting: “Are there any former spouses?” If they answer yes, then you need to know about spousal waivers.
Other must-ask questions: “Are there any children from former spouses?” “Is there anyone else that we need to know about?” “Are there any surprises I should know about?”
Ask clients if there is anyone who could come out of the woodwork who would affect current planning. And again, document these responses in the client's file.
Ed Slott, at irahelp.com, is a certified public accountant and an IRA distribution expert.
