Protecting Survivorship Benefits

Have you considered what you would like to do in retirement? Most people leave their full-time jobs and move into a phase of life that is focused on relaxation, fulfillment, and leisure time.  

They often depend on retirement savings, pensions, and Social Security benefits to keep them financially stable. Most want to maintain their standard of living, include more travel, and do things they could not while they were working. Family time and quality relationships often become more important with many choosing to stay busy by doing volunteer work or going back to school. 

These were likely the same goals Bruce and Anne Freidman, a Brooklyn couple, had for their golden years. However, things did not quite work out that way for them. 

Designating A Beneficiary

The Friedman’s had been happily married for almost twenty years when Anne, a former city school administrator, passed away unexpectedly in September 2001 after a major heart attack. "I lost the best thing that ever happened to me," remarked Bruce Friedman, 61, of his late wife Anne.  

Bruce never had any doubts about being eligible for the $900,862 lump-sum payment from Anne’s Teacher's Retirement System because they sent out statements annually showing his wife had not designated a beneficiary. He thought he would stand to inherit the account as her closest relative.  

However, after her passing, officials discovered a form that had been completed twenty-seven years earlier naming Anne's mother, uncle, and sister as beneficiaries. With her mother and uncle gone, Anne's sister was the only remaining heir. Anne never updated her beneficiary after she and Bruce married. 

The Manhattan Supreme Court concluded that Anne's desire to name her husband as the beneficiary could not be presumed and that the information on file was unambiguous.  “We believe we are following the law as written”. The Appellate Division agreed and upheld the ruling. 

Bruce Freidman was left penniless due to a technicality. But why?

ERISA Protection...Or Not?

You may be asking yourself, "Isn’t the spouse automatically named as the beneficiary on retirement accounts"? Not exactly. 

The Employee Retirement Income Security Act (ERISA) was passed in 1974 to protect the retirement income of employees. Employer-sponsored retirement plans protected under ERISA include pension, deferred compensation, and 401(k) plans. It does not apply to retirement plans established and administered by governmental and religious organizations, including many 403(b) plans. Anne's TRS account was not protected because it was run by a government agency, and therefore, did not automatically revert to the spouse upon marriage. 

Additionally, ERISA laws do not apply to IRAs and Simplified Employee Pensions. Therefore, if you convert your 401(k) account to a Traditional IRA after you retire, ERISA's protection is no longer available. 

The moral of the story is when listing beneficiaries on your accounts, it's crucial to provide precise information. Check your accounts annually to ensure the information listed is still accurate. It is a small thing to do on your part, but it might mean the difference between your loved ones' financial security and ruin.  

 

Michelle Kuehner, ChFC® is the President of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm.