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Shame on the plan's lawyer for many reasons, including being the architect and drafter of the domestic relations order (grade in fiduciary considerations: F)and apparently not giving any consideration to the issues behind blithely substituting the life of one survivor annuitant for another (grade in actuarial considerations: F). Grade in understanding the law in the applicable federal circuit at the time: F. I am a bit more sympathetic on the last point because I thought the Fourth and Fifth Circuits were wrong until the Ninth Circuit declared the winner between QDRO law and QJSA law.

Well, that's by no means the only solution, particularly if the participant wants to avoid current taxation and (possibly) premature distribution penalties. First, think "Fair Market Value." Although Cash Value and FMV are often the same, often they are not. But let's assume they are for the moment. Participant should be able to buy the policy from the plan for FMV. She writes a check to the plan for $13,000, plan assigns ownership of the policy to her. No taxation, and now she can roll her entire account balance in the plan over to an IRA if she wishes - (I'm assuming this isn't a DB plan that prohibits lump-sum distributions.). Sometimes a maximum loan is taken by the plan trustee and policy immediately then assigned. This reduces taxable distribution, but participant now receives a policy with an outstanding loan. There are additional "wrinkles" to this, potentially involving "taxable term cost basis" that require more detailed answers than I have time for now. The insurance company and/or agent should be able to provide you with this type of information - the fancier footwork typically involves policies with higher FMV. Hope this helps.