Hi, I'm Ed Slott and I'm Jeff Levine.
And we're two guys who just love to talk about retirement and taxes.
Look, our mission is simple to educate you, the saver, so that you can make
better decisions because better decisions on the whole lead to better outcomes.
And here's how we're going to do that.
Each week, Jeff and I will debate the pros and the cons of a particular
retirement strategy or topic.
With the goal of helping you keep more of your hard earned money.
At the end of each debate, there's going to be one clear winner.
You!
A more informed saver who can hopefully apply the merits of
each side of the debate to your own personal situation to decide
what's best for you and your family.
So here we go!
Welcome to the Great Retirement Debate!
So Jeff, here's an interesting story.
Actual tax court case, so that should pique your interest.
Alright, tell me, what's going on?
Well, here's a guy who worked for a company for many years, and he left his
multi, well not multi million, one, one point something million, so a million
dollar plan, account balance, retirement account balance, to his ex girlfriend.
To his ex girlfriend?
Yeah, now, you might say, alright, you know, there might
have been something there.
Yeah.
He broke up with her in 1989.
It's a long time ago.
A very long time ago.
And in all those years, he never changed his beneficiary.
Never.
Even though the company asked him to.
As a matter of fact, it was so long ago, in this case, they didn't have
really fancy beneficiary forms.
Yeah, I was going to ask whether he chisel his beneficiary into stone tablets?
Something like that.
It was actually written on a card, like an index card, a beneficiary form
card the company had at that point.
And they went, as they computerized over the years, they sent him
notification after notification.
He just died.
So we're talking about many years ago.
Do you want to update your beneficiary form?
They said, because we're going to a computerized format.
And if you don't.
Don't update it, we're going to assume what you had on that handwritten card,
that's your selection for beneficiary.
And he never changed it, he never changed it, he never changed it, well
now he's dead and she gets the money.
Now he died unmarried, so he had no spouse and no children.
So why is there a court case?
Well, with a million dollars in a retirement account, you know people
are coming out of the woodwork.
Somebody's going to be upset about that.
His two brothers.
Ah.
And they said, no, this can't be what he, what he broke up with her in 1989.
She can't possibly get the money.
The court says, yes, she gets the money.
They want, now where it stands, and who knows where it is, by
the time you see this, uh, could change a little, I don't think so.
They want to appeal it.
my position, my feeling, they will lose.
They will lose every case.
They even said that in this court case.
He had every chance to change his beneficiary.
He opted not to do it.
That's right.
It was his money.
He can choose to do what he wants.
It's like that commercial.
It's your money.
Do with it what you want.
Yeah.
And that's what happened.
And now, I saw, when I saw the comments to the article, uh, Wall
Street Journal ran an article on it.
They had tons of comments.
And they were in a bunch of camps.
Some camps was, she shouldn't get the money.
Uh, you know, and she had ended up getting married to somebody else and so forth.
That must have been an interesting conversation.
Yeah, yeah.
Yeah, uh, yeah, I don't even want to go there, right.
And so that was part of the camp.
People said, uh, well, she shouldn't get the money.
She's just not right.
And then the brothers should get the money.
There is blood relatives more than her.
And in every case, uh, she's gonna get the money.
Yeah, I mean, it stands to reason that he's able to do what he
wants with his money, right?
And, and maybe it seems that if he was intentionally passing on these things that
his true intent was to leave his money.
To his ex girlfriend.
Who knows?
Maybe they made some sort of crazy pact back then.
They said, if you know what, if neither one of us finds love, we'll leave
each other our retirement accounts.
Well, that's what some people said, and what they said also, and I believe
it was in the court case, nobody knows what was, he's dead, nobody knows
what was in his mind, why he did that, but he, He purposely did not update
that card, that beneficiary card.
So now, she will get the money.
I don't care how many times they appeal.
My feeling is they're going to lose.
They'll just end up wasting money on attorneys.
Because this goes by operational law.
It's a contract.
Seems likely.
And this is a company plan.
They can't just say, you know what, he's right.
She shouldn't get the money.
They have fiduciary liability.
Maybe they should decide what he should do with his money.
Right, but by law they can't.
That's right.
They, you know, there's an ERISA plan and all of that, so speaking of
ERISA, this begs another question.
What if instead of being the ex girlfriend, She was his ex wife.
Well, if she was his ex wife, then as long as they were married for at least
a year, that she would have had to have been his beneficiary of the plan.
There would have been no choice.
Here, with an ex, like a girlfriend, a boyfriend, uh, you
know, anyone other than a spouse.
It's your choice who you want to make your beneficiary.
But with ERISA plans, these are typically 401ks, pension plans, etc.
You're, often times, if you're married, your spouse is your beneficiary right
away, but there is a rule that ERISA has that says, if you get married, the plan
can allow up to a year before that new spouse becomes the automatic beneficiary.
But they don't have to.
Uh, remember that one case with six weeks?
Uh, they don't, right, they don't have to.
The plan can wait, but they don't have to allow.
That was the, uh, the Kidder case from many years ago.
I think it was.
Yeah, yeah.
New spouse, six weeks.
That's right.
Six weeks after they were married, she killed, I mean, uh, died.
She mysteriously died and she got the money.
Exactly.
Yes, yes.
After only six weeks.
So, uh, let's go back.
Let's say he was the ex spouse.
So let's say he left his ex wife on the beneficiary for okay.
Now what would have happened?
Well, probably depends upon what state they live in, right?
Because many states upon divorce, you are automatically revoked unless
and it does happen from time to time unless your ex spouse re-nominates
you as the beneficiary afterwards.
Yeah, a number of states, more than half of them actually, have revocation upon
divorce laws, which means if you left your, you got divorced, and a big mistake,
very common mistake, you go through the divorce and everything else, and you
forget to update your beneficiary form, and you leave now your ex spouse on there,
uh, In those states, she's, she or he is immediately removed as beneficiary.
Yeah.
Well, you know, those laws come from somewhere, right?
Like a bunch of politicians forgot to update their beneficiaries afterwards.
And they said, no more, that's it.
We're going to make this automatically law.
Right.
And in the, this was a Supreme Court case, by the way, that, uh, established this,
and even the justices, one of them said, and you could, uh, listen to the video,
uh, not the video, there's no video of the Supreme Court, but the audio you could
listen to, and one of them, uh, Uh, ask the question, but what if, how do we know
what exactly what I was talking about?
What was in his mind?
Maybe there was something there and he purposely wanted to leave it to his
ex spouse and they all decided that exactly what you said, that if that
was his intention after the divorce to make sure your intentions are carried
out, you update the beneficiary form.
and name that ex spouse so everybody knows that's what you wanted.
All right.
So if that's what you want.
So now I see what you're getting at in terms of our initial question, is it
better to be, uh, you know, a girlfriend or a ex girlfriend or an ex wife had,
uh, with, with until you're married, there is no, like, unless you're married,
there is no automatic revocation.
You can live together.
You can be girlfriend, boyfriend, doesn't matter.
But unless you're married, Once you break up with that individual,
there is no automatic revocation of that beneficiary form, right?
So this is an unusual situation because the whole point of we we
call this an ERISA plan It's a say a 401k under the federal laws.
Spouses have huge protections.
Mm hmm.
And in almost everything the spouse is protected Except in this scenario the
ex girlfriend got the million dollars.
Got the whole thing, not even half.
Right.
The whole thing.
Got all of it.
So she stood in a better position than being, than being married.
Makes me wonder, like, as you think about that, like, what other areas
of the law, you know, are, are people better off being married or not married?
Uh, and, and just think of a few off top of my head, right, as, as people
are thinking about, you know, again, not necessarily directly related to that,
but if you're, committed relationship versus being, let's say, married, which
also should be a committed relationship.
That's a good one.
You know what I mean.
If you're just, if you're together, yes.
Like a lot of people, especially as they get older, they don't want to get married.
They've been married once already.
They want to keep things separate, but they like to be together.
There might be some advantages on the income tax side of the equation because
if you're married and file a, a joint return, there can sometimes be a marriage
penalty on certain issues versus if you're separate and file single tax
returns, there can be a benefit there.
Uh, sometimes if an individual was married already, they might be receiving certain
social security benefits from an ex spouse, where if they get remarried, those
social security benefits might go away, so it might be better off for them to remain,
uh, separate as well, but it's interesting to think, are there certain times when
you'd be better off being not married, being a, again, a boyfriend or girlfriend
and maintaining that as a relationship status versus actually being married.
Well, the point of this, uh, what I wanted to get to, is the
importance of a beneficiary form.
It's an ironclad contract.
And this is not the first of these cases.
I mean, this is one of the strangest ones I've seen.
I mean you know, ex girlfriend from 1989.
That's when he broke up with her in 1989, and he just died recently.
But checking beneficiary forms is critical.
It may be one of the single biggest mistakes people make.
You're familiar with other cases like this.
A lot of them are in the divorce area.
Remember the Kennedy case?
Sure.
Supreme Court case again.
Right.
Yep.
Uh, the ex wife got, uh, got the money, even though she said
I, she waived her, her rights.
She was a liar.
Yeah, yeah, yeah.
And the daughter went to the court.
She said, but, but he didn't want to, he didn't want her to get the money, but
he didn't change the beneficiary form.
And they said the same thing in that case.
They said he had every opportunity to change the form, but he chose not to.
So and she got, why did she get the money?
Well, because she was named on the beneficiary form.
Right.
And also, you know, this is an ERISA case.
Uh, so, you know, you got to look at updates in your life.
You got to, uh, you, you have to make sure your beneficiary forms
say what you want them to say.
Going back to the ex girlfriend case, we don't know what he wanted, but
But apparently that's what he was.
He had numerous warnings or not warnings, uh, communications over the years from
the company over many, many years, over decades, it would seem to me like even in
that case, if I was his advisor, right.
And he said, yeah, you know, I know this is weird, Jeff, but.
I've got this girlfriend from 1989.
And she's now married to somebody else.
And she's now married, she's now married to someone else.
But I really want to leave her this money.
My advice still might have been, hey, why don't we fill out a new beneficiary form?
Right, make it clear.
And just, that's right, make it clear, remove any doubt.
You know, the beneficiary form is what controls the disposition of
assets most of the time, unless it's overridden by some sort of federal
or state law, things like that.
But you know, the point is, this is like the last act you have on this earth.
Like you're you're gone and this is the last little bit.
I can't think of a worse scenario than having your final wishes not fulfilled
because it either wasn't clear or because there was ambiguity and you left an
opportunity for someone else to interpret what you really wanted to happen.
Right, and you should look at, uh, activities in your life.
I call them life events when they're birth, a death, a marriage, a
divorce, a new grandchild, change of tax laws, whatever it is.
These things should be updated.
They override the wills.
Oh, that was another thing.
When I said, uh, there were a lot of comments online on the
article, people said he should have said something in his will.
Yeah, but where there's a will, there's no way it's gonna work.
Right.
Yeah.
But these were some professionals on there says if he should have said something
in the will that she doesn't get it, she still would have got it because the
beneficiary form overrides the will.
It's a strong document.
Now a little difference been if this was an IRA, you don't have to in
most cases or then maybe community property leave to a spouse, right?
You could leave to anybody.
In fact, there's cases there where people have taken their 401ks, move them to
an IRA And then name, let's say their kids gotten remarried and said, sorry,
new spouse, you don't get the money.
It goes to my kids when I'm gone.
Because the ERISA laws protecting spouses do not apply in an IRA.
That's right.
Yep.
In fact, there's even cases on file where, uh, people with, uh,
non-ERISA plans, things like 403Bs, don't get the same protection.
That's right.
There's that famous case, I don't know if it was a case, but, uh, I think it was.
We used to refer to it, uh, matter of fact, I still use it.
It's from January 20, 2005.
From the New York Post.
Uh, it was called Pension Pickle.
We still give it out at our seminars.
I still remember the headline, Broke Widower Loses $1 million to in-law.
Right.
You're a financial advisor, you can't buy headlines that good.
I know, I know.
It was a great headline and, uh, you just have to see the headline.
So this woman worked, uh, you know, 403B for the New York City school
system, accumulated a million dollars.
She died and, uh, she didn't, the spouse got disinherited.
He said, how could this possibly be?
Well, when she filled out her beneficiary form, it was before she was married.
Years and years ago.
So, he wasn't even in the picture.
Who did she name?
Her brother or mother?
Her mother, her uncle, and her sister, I think.
Yeah, the brother.
The, the sister got the money.
The mother and the uncle, I think, uh, pre deceased.
Yep.
And the sister got the money because she was on the beneficiary form.
He said, but I'm the spouse.
I've been married to her for years.
Well, she didn't update the beneficiary form.
Yeah, and, and I'm sure people are, again, you know, this is a confusing area.
People are saying, but wait, they were married for more than a year.
What's the difference?
The difference is state and local 403Bs, like this one,
are not covered under ERISA.
Right.
You know, what, what seems as, you know, As though it's so simple, you
know, hey, just write down a name on a piece of paper is actually dictated
by , a various number, a significant number of, of laws that all have, uh,
you know, strange interactions with one another where, you know, ERISA
overrides the beneficiary form, but state, but beneficiary form overrides
the will, but state law can override, I mean, it, it's a very complicated mess.
And again, the challenge here is not that it seems difficult and is difficult.
The challenge is it often seems simple, so people take for granted that what
they're doing or what they think they're doing is actually going to happen,
when in reality they're not aware of the nuances and intricacies of the law
and that's when these mistakes occur.
Yeah, make sure to update.
forms, make sure you can find them.
I've seen problems recently with some mergers and financial planning firms
too, uh, where the documents don't carry over to the, uh, next institution
or they list the wrong beneficiary.
We just saw a case where they listed the estate rather than the
name beneficiaries and there were millions of dollars there and nobody
noticed it until the guy was dead.
Well, you can't change it after that.
Yeah, it looks, look anytime there's a question about your beneficiaries,
there's a change in institution, a change in life events, etc.
Then, you know, I, I, I adhere to one philosophy.
When in doubt, fill one out.
Oh, that's a good one.
Fill out a new beneficiary form.
That's it.
When in doubt, fill one out.
Yeah.
It can't hurt.
If you're saying the same thing, All that will happen is it'll be even more
clear that that was your intention.
And keep a copy because there could even be a problem even if you
think the institution has a copy.
It may be an old copy, who knows, before they went through mergers or
transitions and things like that.
Yeah.
Well, update your beneficiary form.
Absolutely critical step as always.
Ed, thanks for updating us on that case.
That is a weird one for sure, but a great opportunity to learn from.
That's right.
Check your beneficiary forms.
Do it now.
That's right.
And we'll see you next time on The Great Retirement Debate.
Jeffrey Levine is Chief Planning Officer for Buckingham Wealth Partners.
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