Difficult Beneficiary Scenerio

[Below Ground]

Worker dies in late February. His name beneficiary, who is also his sole living relative, is a daughter. She then dies in early March. Her remaining relatives are two minor children (grandchildren of worker), who she defined as her beneficiaries in a will (not related to Plan). A court order has been issued that says pay to either (???) the estate or the minor children. If the latter, monies are to be sent to a "trust account" for the 2 children.

My thoughts are that the payment should be to the estate as the grandchildren were never named as beneficiary of the worker. Comments?

[jpod]

Presumably the plan document identifies the beneficiary as of the date of death of the participant (rather than at a later date, such as the date of payment). Therefore, how could payment be made to anyone other than the estate of the daughter? (Daughter may have creditors who will swallow the entire distribution, after taxes.)

[Below Ground]

The problem is timing. The daughter was alive at the time of his death, but dead at the time payment could be made. Note that this was a 2 week period!

Jpod - You believe the estate of the daughter, not the worker? I can see the logic. Either way, this is messy.

[J Simmons]

Do the plan's default death beneficiary provisions read in a way that they apply when either a participant or beneficiary dies? or just when the participant dies? If by its terms it reads as only applying to when the participant dies, I'm with jpod.

If the default death beneficiary provisions specify that they apply on the death of a beneficiary as well as a participant, then the children would prevail.

The plan terms are determinative. End of story. See U.S. Supreme Court's 1/26/2009 decision in Kennedy v Plan Administrator for DuPont Sav. and Investment Plan, Docket # 07-636

[jpod]

Yes, I meant the daughter's estate. Sorry for the confusion. Why would that be messy?

[Below Ground]

The exact language for definition of beneficiary is "person(s) entitled to receive benefits... upon the Participant's death." The Plan also allows the Beneficiary to designate a beneficiary. (That did not happen prior to her death.) It then goes on to say when there is no beneficiary that the order is spouse, children (equal shares), estate. I guess that since daughter was valid beneficary, and there was no beneficiary designated for her, and she is not married, then children are the beneficiaries. Plan terms say that since they are minors (one is 18 and the other 17), then payment is made to court appointed legal guardian.

Why messy? Well, if I am right in the preceding then there is not a simple "pay to beneficiary who is...". I just like things direct and "clean cut", without potential for dispute. Of course, that is not the real world.

Thanks for all your comments.

[J Simmons]

The exact language for definition of beneficiary is "person(s) entitled to receive benefits... upon the Participant's death." The Plan also allows the Beneficiary to designate a beneficiary. (That did not happen prior to her death.) It then goes on to say when there is no beneficiary that the order is spouse, children (equal shares), estate. I guess that since daughter was valid beneficary, and there was no beneficiary designated for her, and she is not married, then children are the beneficiaries. Plan terms say that since they are minors (one is 18 and the other 17), then payment is made to court appointed legal guardian.

Why messy? Well, if I am right in the preceding then there is not a simple "pay to beneficiary who is...". I just like things direct and "clean cut", without potential for dispute. Of course, that is not the real world.

Thanks for all your comments.

But that language in the plan you quote only mentions the Participant's death for which the plan specifies default beneficiaries in the absence of an affirmative designation.

When the Participant died, the daughter became the death beneficiary per the default plan terms. She then became entitled to receive the benefits in question, even though the actual payout did not occur before her own death two weeks later.

Unless the plan's provisions say that the default beneficiaries spelled out in the plan also apply on a beneficiary's death, then the daughter's estate wins out over her children.

If the plan's provisions say that the default beneficiaries spelled out in the plan also apply on a beneficiary's death, then the children win out over the daughter's estate.

By the way, it would be odd language but possible that the plan specifies that a participant or beneficiary could name a death beneficiary through that participant's or beneficiary's last will and testament. If so, then the children would win out over the daughter's estate.

[Bird]

I'm looking at documents from two different providers; both say the beneficiary's estate is the beneficiary if the beneficiary dies after the participant but before the payout starts (one expressly permits the Beneficiary to designate a beneficiary).

I'd look more closely at the document - this may be under "Death Benefits" and not "Beneficiary." If there's nothing definitive, I'd probably go with the beneficiary's estate.

_____________

Just saw your reply as I was typing this...

It then goes on to say when there is no beneficiary that the order is spouse, children (equal shares), estate. I guess that since daughter was valid beneficary, and there was no beneficiary designated for her, and she is not married, then children are the beneficiaries.

I disagree. It's not that there was no beneficiary, it's that the bene died before payout.

[david rigby]

Plan terms say that since they are minors (one is 18 and the other 17), then payment is made to court appointed legal guardian.

Be careful about assuming an 18-year-old is a minor.

[Below Ground]

Getting messy? I would say a little. Anyway...

My logic in Post #6 was that since the Plan allows the Beneficiary to make a designation of beneficiary, the Beneficiary in de facto becomes the Participant at this point (for this concern). If so, that would mean (I think) that you apply the Plan terms on what to do when no beneficary is named; leading to spouse, children, estate. Does this make sense?

I too am concerned about having "minor" mean under age 21. I can't find anything that uses 18, however. It seems that every thing that addresses "minor children" (eg. ownership attribution) uses age 21. Comments here would be very welcomed.

In one way I suppose this is a moot point. Going to her estate means the children. Of course, there may be tax ramifications that I don't know about.

[jpod]

Below Ground: If you think there is language to support the interpretation that the default beneficiary priorities would apply to a deceased beneficiary, it could make a huge difference. First, you are correct that there may be a greater tax burden if it goes to the beneficiary's estate, rather than directly to the children. Second, if it goes to the estate, creditors get first dibs, but if it goes to the children, I would expect that creditors of the deceased beneficiary cannot touch it. Moot point, of course, if the estate has enough other assets to satisfy creditors.

[J Simmons]

Getting messy? I would say a little. Anyway...

My logic in Post #6 was that since the Plan allows the Beneficiary to make a designation of beneficiary, the Beneficiary in de facto becomes the Participant at this point (for this concern). If so, that would mean (I think) that you apply the Plan terms on what to do when no beneficary is named; leading to spouse, children, estate. Does this make sense?

It's logical, but is not literal unless the provisions of the plan say that you are to treat a death beneficiary who dies as a participant.

I too am concerned about having "minor" mean under age 21. I can't find anything that uses 18, however. It seems that every thing that addresses "minor children" (eg. ownership attribution) uses age 21. Comments here would be very welcomed.

That's a matter of state law. For example, some say that one is a minor until the later of age 18 or graduating high school, but in any event at age 19--or earlier if court orders the child's emancipation.

In one way I suppose this is a moot point. Going to her estate means the children. Of course, there may be tax ramifications that I don't know about.

If the estate has creditors, the death benefits passing through the estate might have to be used to satisfy those creditors, leaving little or none of it for the children. On the other hand if the death benefits circumvent the estate and go directly to the children, the estate's creditors cannot get at it.

[masteff]

My logic in Post #6 was that since the Plan allows the Beneficiary to make a designation of beneficiary, the Beneficiary in de facto becomes the Participant at this point (for this concern).

Just as a suggestion for keywords to look for in your text... ours used the term "restricted participant" to refer to benes, alt payees and ee's w/ rollover prior to eligibility. It went on to explain that restricted particpants have the rights of participants w/ the exception of making or receiving contributions. This meant sections such as the one quoted, where it "Participant's death", would apply to the bene by virtue of the restricted particpant definition.

[Bird]

My logic in Post #6 was that since the Plan allows the Beneficiary to make a designation of beneficiary, the Beneficiary in de facto becomes the Participant at this point (for this concern). If so, that would mean (I think) that you apply the Plan terms on what to do when no beneficary is named; leading to spouse, children, estate. Does this make sense?

I (still) disagree. Especially since we have a few examples of plans that do specifically address this, and say the bene's estate becomes the bene in the event of the bene's death after the participant's death but before payout. The beneficiary became the de facto "owner" of the account at the participant's death, not a contingent owner but the owner, with rights to transfer it (by beneficiary designation), and if those rights aren't exercised, then it passes to the estate like any other asset. At least that's my logic.

[J Simmons]

Below Ground,

Unless a literal reading of the plan's language allows you to apply the default death beneficiary provisions to one who is a death beneficiary herself rather than a participant, you ought to (a) seek written agreement by the court-appointed personal representative waiving any claim by the estate before you pay directly to the children (or conservator of minor children), and (b) failing that, interplead the benefits in federal district court, naming both the children and the estate as defendants.

If you do not and simply pay directly to the children, the personal representative could (either of his or her own volition or under court order obtained by the estate's creditors) pursue payment of the same benefits a second time from the plan, claiming that literal interpretation of the plan documents is that the default beneficiary provisions do not apply upon death of a death beneficiary, and that therefore the estate as the successor in interest of the deceased death beneficiary should have been paid the benefits rather than the children.

[Below Ground]

Wow! As I said -- messy.

These are great comments. Thanks to all.

We do have an order that says "pay to either"! It does seem to give preference to the estate of the Participant, but that seems to "violate" the designation of the daughter as the beneficiary.

We are checking with the document vendor. I will let everyone know what they say.

[J Simmons]

Wow! As I said -- messy.

These are great comments. Thanks to all.

We do have an order that says "pay to either"! It does seem to give preference to the estate of the Participant, but that seems to "violate" the designation of the daughter as the beneficiary.

We are checking with the document vendor. I will let everyone know what they say.

The fun part is that the state probate court does not have jurisdiction over the issue. You apply the plan's terms in accord with federal law, irrespective of the court order. It gets real messy if you have to get a writ of habeas corpus in federal court to override the state court's order.

[david rigby]

We do have an order that says "pay to either"!

Certainly, the attorneys in this discussion thread will have more insight than I, but it seems the PA should look to the plan's terms, and possibly administrative interpretations that provide precedent, to determine the proper beneficiary. Is there a reason that a court order would precede the PA's determination?

[masteff]

We do have an order that says "pay to either"!

Certainly, the attorneys in this discussion thread will have more insight than I, but it seems the PA should look to the plan's terms, and possibly administrative interpretations that provide precedent, to determine the proper beneficiary. Is there a reason that a court order would precede the PA's determination?

Also be careful of whose court order it it.... the consensus above is the account became the daughter's even if the transfer had not yet occurred. So a court order on behalf of the worker has no power. And david rigby may also be alluding to ERISA preemption, which could also make the order moot.