Howdy! I’m Professor William Byrnes of Texas A&M University School of Law, where I founded the graduate program for wealth management. Today, I want to share with you a cautionary tale about estate planning, specifically focusing on retirement accounts, designated beneficiaries, and former romantic partners.

Three-Part Discussion Overview:

1. Misconceptions about Retirement Accounts and Wills: Clients often assume their retirement accounts will automatically pass to the heirs named in their will. This is a common misconception.
2. Case Study: Federal Court Ruling: We’ll explore a federal court case where an ex-girlfriend from a two-year relationship, named as a 401(k) beneficiary over 27 years ago, was found entitled to inherit a substantial balance—over $750,000.
3. Advisors’ Role in Ensuring Up-to-Date Beneficiary Designations: The conclusion emphasizes the importance for advisors to proactively communicate with clients to regularly update their beneficiary designations on all accounts, including retirement plans and insurance policies.

Part 1: Misconceptions about Retirement Accounts and Wills

Beneficiary designations are often overlooked and neglected during the estate planning process. Clients typically execute a will or create a trust with their financial advisor and assume that all their assets, including retirement accounts and insurance policy proceeds, will pass to the heirs named in their will, such as their children or grandchildren. However, retirement accounts, including 401(k)s and IRAs, follow their own specific rules.

For example, the fiduciary and operating standards of a typical 401(k) retirement plan are governed by a federal statute known as ERISA. ERISA, shorthand for the Employee Retirement Income Security Act of 1974, is a comprehensive statute that establishes the standards of conduct and responsibility for fiduciaries of employee benefit plans.

When opening a 401(k) plan account with the plan administrator appointed by the employer, the employee can designate one or more beneficiaries to inherit the account. If no beneficiary is designated, the account balance generally will be distributed to the deceased account holder’s estate.

The estate administrator should, in turn, distribute the proceeds from the 401(k) account according to the deceased person’s will. But if no will was created by the deceased, which is true in a majority of cases, then the estate must distribute the assets of the estate, including the retirement account proceeds, according to the intestate succession laws of the state or country with jurisdiction over the estate. Normally, the intestate succession laws provide first for a surviving spouse, and secondarily for children. If the deceased isn’t married and does not have children, then the succession law will favor the immediate family. In the federal court case I’ll mention next, the deceased was not married and did not have children.

Part 2: Case Study: Procter & Gamble v. Estate of Jeffrey Rolison

Let’s dive into a real-world example that illustrates the importance of maintaining current beneficiary designations.[1]

Jeffrey Rolison, a long-term employee of Procter & Gamble for 30 years, participated in the Procter & Gamble employee retirement plan. In 1987, when Mr. Rolison provided his personal information to his employer’s retirement plan administrator, he named his then-girlfriend as the beneficiary in 1987. The couple ended the relationship two years later, in 1989. Then for 25 years until he died in 2015 at the age of 59, Mr. Rolison had a close relationship with a girlfriend. However, during these 25 years, he did not update the beneficiary designation for his retirement plan.

Upon his death, the Procter & Gamble retirement plan paid out the account balance, which had grown to $754,000, to the ex-girlfriend. The administrator of Jeffrey Rolison’s estate sued the Procter & Gamble retirement plan, arguing that the retirement plan administrator failed to adequately inform Rolison about changing the beneficiary designation. From the perspective of the estate, whose immediate family was his two brothers, Jeffrey Rolison did not intend for the ex-girlfriend of 25 years ago to inherit over $750,000.  

The U.S. District Court for the Middle District of Pennsylvania ruled against the estate in April 2024. The court found that Procter & Gamble had provided sufficient notifications to Mr. Rolison over the years with instructions regarding changing the account beneficiary. Moreover, Mr. Rolison had accessed his retirement account online multiple times and did not change the beneficiary. Thus, the court concluded that Rolison had the opportunity to change the beneficiary but chose not to do so.

Part 3: Ensuring Up-to-Date Beneficiary Designations

This case highlights the critical role of advisors in estate planning. Advisors should engage with their clients to review all past and current retirement account plan documents and any amendments to ensure that the rules within these documents align with the client’s desired estate plan.

When a participant designates a beneficiary, that individual will likely receive the funds from the plan, regardless of any intervening facts. Retirement plan administrators require a beneficiary’s name, contact information, and often a Social Security number for verification to be able to reach out to the designated beneficiary to facilitate the distribution after the death of an account holder.

Conclusion

Advisors need to regularly contact and communicate with their clients to ensure that all designated beneficiaries are current on retirement accounts and other assets, such as insurance policies. Courts will almost always uphold a retirement plan account holder’s beneficiary designation, even if it seems the decedent would have chosen a different result in hindsight.

If you’re interested in reading more about this topic or hundreds of our other articles, please visit Tax Facts (American Legal Media). For wealth management studies, contact the admissions department at Texas A&M University School of Law for information about our courses and degrees.

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[1] The Procter & Gamble U.S. Bus. Servs. Co. v. Estate of Rolison, Civil Action 3:17-CV-00762, 6 (M.D. Pa. Apr. 29, 2024).