Clients have a right to keep their IRA beneficiary designations private. But you might want to advise them that this privacy can have a high price for loved ones – as the case of the late Wayne Wilson shows.
In 2010, the 9th Circuit Court of Appeals upheld the priority of an IRA beneficiary designation over the claim made by a widow who asserted her rights to receive qualified retirement plan benefits under ERISA’s surviving spouse requirements. The case (Charles Schwab & Co. v. Chandler) was brought by the IRA custodian, Charles Schwab, to resolve a dispute between the four married children of Wayne Wilson and his widow, Katherine Chandler, to whom he had been married since 2000.
Wilson had participated in his company’s 401(k) plan until making a rollover to an IRA in 1994. He then continued to consolidate and move his IRA assets between accounts and custodians until his accidental death in 2005, when his truck and horse trailer was washed away and overturned in a flash flood in Arizona.
Rather than release Wilson’s IRA money to the four children whom he had designated beneficiaries, Schwab asked the court to resolve the disputed claims. The widow claimed ERISA had given her spousal rights to be paid Wayne’s 401(k) plan money through a Qualified Joint and Survivor Annuity (QJSA), and she had not waived these rights.
Both the U.S. district and circuit courts rejected this claim, in part because she and Wayne had not been married at the time the money in question was rolled over from the plan to an IRA.
Unlike ERISA plans, IRAs do not give spouses automatic rights to receive distributions or annuities on death.
Had Katherine wished to create a valid claim to Wayne’s IRA money, she should have prevailed upon him to change his IRA beneficiary designations.
Key Point: This case highlighted a key difference between qualified plans and IRAs, for estate planning purposes. Unlike qualified plans, IRAs give owners the option of keeping assets and beneficiary designations private.
However, unfortunate outcomes may occur when people marry later in life without a clear mutual understanding of beneficiary designations. Wayne was a well known and widely admired civic leader when he died in a tragic accident at age 65. But because his widow challenged Schwab’s right to honor the beneficiary designation, his private estate planning requests became part of a high-profile public dispute, and his children experienced additional legal costs and delays in receiving their legacies.
It’s a good idea to periodically review clients’ IRA beneficiary designations to make sure they reflect current planning and wishes. This can be especially important whenever major lifestyle changes occur, such as divorce or remarriage.
Read more about the Charles Schwab & Co. v. Chandler case.
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