Retirement savings

Ex-Husband Must Return Late Wife’s Retirement Savings

Dividing retirement savings in an Arizona divorce proceeding can result in confusion and inequity. Sometimes the problems don’t appear for years — or even decades. A recent Arizona appellate decision illustrates the importance of paying attention to retirement savings plan details.

Sandra Brown’s (brief) marriage

In 1992, Sandra S. Brown married John M. Brown. That marriage didn’t last long, however. Mr. Brown filed for divorce in late 1994. Their divorce was finalized a year later — or, at least, it was almost finalized.

Ms. Brown worked at Delta Airlines, and she participated in the company’s retirement plan. Her defined contribution plan required her to name a beneficiary, and she listed Mr. Brown to receive the benefits upon her death. When the couple divorced in 1994, they initially failed to address the retirement plan. They updated their divorce decree in 1995 to address that failure.

The 1995 update established a “Qualified Domestic Relations Order” — a QDRO, as lawyers and retirement plan administrators universally refer to such orders. Because the Delta plan was covered by the federal Employee Retirement Income Security Act (ERISA), a QDRO was required to allow Ms. Brown to change beneficiaries. It also divided the plan to take account of Mr. Brown’s community property interest, acquired during their brief marriage.

The QDRO recognized that Mr. Brown had a community property interest in contributions to the Delta retirement plan, and named him as an “alternate payee” as to one-half of all contributions made during the three-year marriage. It specifically established that Mr. Brown was not to be treated as Ms. Brown’s surviving spouse.

Twenty years later …

Ms. Brown died in 2017. Though divorced for more than twenty years, she failed to update her beneficiary designation. It still listed her ex-husband to receive the entire account.

By that time, between contributions (from her and from her employer) and investment earnings, the account exceeded $325,000. Delta transferred the entire account to Mr. Brown.

Retirement account participants who divorce often fail to make beneficiary changes. Elder law and probate practitioners frequently see similar stories. To help address the problem, Arizona (like a number of other states) has even adopted a statute. Divorce automatically undoes beneficiary designations — as well as will and trust provisions, and even joint ownership with rights of survivorship.

The Delta retirement account, though, is governed by ERISA — which is a federal law. The courts have consistently held that state laws are irrelevant. In fact, the U.S. Supreme Court, in the 2001 case of Egelhoff v. Egelhoff, invalidated a Washington state statute very much like Arizona’s law.

So how can a newly-divorced person remove his or her ex-spouse from beneficiary designations? And how does an ex-spouse assert community property rights to accumulated retirement savings? By having the divorce court issue a QDRO. And Mr. and Ms. Brown did that. Clearly, Ms. Brown could have changed beneficiaries if she had just done so.

Can Ms. Brown’s estate recover her retirement savings?

In the probate proceeding, Ms. Brown’s estate sued Mr. Brown for recovery of the bulk of the Delta retirement account. His argument: he was named as beneficiary, and ERISA prevented the court from changing that status. The estate argued that the QDRO had already changed the status, and Ms. Brown had died without a beneficiary.

The probate judge ordered Mr. Brown to return the account. Earlier this month, the Arizona Court of Appeals, in a Memorandum Decision, upheld the probate court’s order.

Ordering Mr. Brown to return the funds does not violate ERISA or the Egelhoff decision, according to the appellate court. Because the QDRO disposed of Mr. Brown’s claim to be a beneficiary, he had no right to receive the money. In Re Estate of Sandra Sue Brown, February 2, 2021.

What does the Estate of Brown decision mean for divorced individuals?

The outcome in Sandra Brown’s probate case seems logical. Mr. Brown shouldn’t benefit from her twenty-year delay in getting her beneficiary designation updated. But there are a number of observations that we might make about the case, and the outcome. Those include:

The importance of getting a QDRO completed. The only reason Mr. Brown didn’t benefit from the harsh ERISA-driven result was that there was a QDRO. Divorcing couples really need to deal with retirement accounts in order to prevent that kind of injustice.

Recently-divorced workers really need to act. In the twenty years after her divorce did Ms. Brown think about her beneficiary designation? Did she even remember who was named? Would she have actually wanted Mr. Brown to receive the account? The lesson for all of us: check the beneficiary designations on your retirement accounts regularly — perhaps at the start of each year, as a way of making sure that you actually get around to it. Check right now, in fact.

Taxes. A problem unmentioned in the appellate decision is how the income taxes will be paid on Ms. Brown’s retirement account. If Mr. Brown received the $325,000 in cash, he also has an income tax bill to pay. Between state and local taxes, and depending on his other income, he might owe as much as 30-40% of that distribution. Does he have to turn over the entire $325,000? If so, who will pay his income taxes? He can’t simply say “oh, sorry, IRS — I didn’t get to keep the money.”

Maybe Mr. Brown simply rolled the retirement savings account into an Individual Retirement Account (IRA) in his own name. If he transfers that to Ms. Brown’s estate, he will trigger the same tax consequences.

Final thoughts

The Court of Appeals decided not to publish the Estate of Brown decision. It can not be cited as precedent in other cases. It joins a number of other decisions that reflect the court’s views, but do not have precedential value.

The story is still compelling. Can we tell what Ms. Brown actually wanted? Not on the basis of the court decision. But we’re pretty sure she didn’t want conflict, her money going to lawsuits and lawyers, and a four-year delay in resolving her estate. Careful planning is key to good results.

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