SPOUSAL WAIVERS OF RETIREMENT PLAN DEATH BENEFITS

By Jeffrey S. Kahn, Richard H. Waxman, and Iven R. Taub

Every practitioner who advises retirement plan sponsors or trustees, retirement plan participants, or spouses of retirement plan participants, should take note of a November 30, 1994, decision of the U.S. District Court in Fort Lauderdale, Florida [Lasche v. The George W. Lasche Retirement Plan, et. al., Case No. 93-8645-CIV; 1994 WL 685514 (S.D. Fla.)]

In that case a Federal Judge ruled that the wife of a participant in a "Keogh" plan was entitled to the entire death benefit under that plan. The Judge made this ruling despite the fact that the wife had signed a postnuptial agreement and a separate waiver form, both of which purported to waive her rights to this benefit.

The subject matter of the case was a "Keogh" profit sharing plan (the "plan") which was maintained by a Florida resident (the "husband"). The plaintiff in the action was the husband's second wife (the "wife") who had married the husband in August 1985. The defendants were the husband's three adult daughters from his first marriage (the "stepdaughters"). Shortly after the marriage, the husband and wife signed a postnuptial agreement which included the following waiver of any right to each other's retirement plans:

(c) RETIREMENT EQUITY ACT. Each party waives and releases any claim, demand or interest in any pension, profit sharing, Keogh or other retirement benefit plan qualified under ERISA and the Internal Revenue Code of the other party and agrees to execute any documentation to verify and confirm this fact with the administrator of such plan.

In July 1989, the husband decided to transfer the plan to a major stock brokerage firm. In connection with setting up the account, the broker had the husband and wife sign a standard new participant form prepared by the brokerage firm. The form purported to accomplish three things: 1) the husband's adoption of the brokerage firm's prototype retirement plan; 2) the husband's designation of the stepdaughters as the beneficiaries of the death benefit under his Plan; and 3) the wife's consent to the designation of the stepdaughters as beneficiaries.

The husband died in May 1993. At that time, the account balance in the plan exceeded $460,000. The stepdaughters, acting as plan administrators and successor trustees of the plan, instructed the brokerage firm to pay over the entire account to themselves. The wife objected on the grounds that her rights under ERISA had been violated, since she had not knowingly or intentionally waived any right to the assets in the plan. The law suit soon followed.

The complaint alleged, that the wife's purported waiver of her right to the death benefit in both the postnuptial agreement and the new participant form were invalid under applicable Federal law, and therefore, the wife was entitled to the entire account balance. The District Court agreed. In granting the wife's motion for summary judgment, the judge applied the following analysis.

The administration of retirement plans is governed by ERISA. This Federal statute is all controlling, having been held to preempt any state regulation of retirement plans. An important factor in this case was the Retirement Equity Act of 1984 (REA) which had substantially amended ERISA. One principal purpose of REA was to protect each spouse's rights to his or her spouse's pension benefits.

REA added to ERISA the requirement that retirement plans provide two alternative death benefits for a surviving spouse. One is known as the qualified preretirement survivor annuity (QPSA) which applies when the participant dies before receiving any pension payments. The other (which was not a factor in the Lasche case) is known as the qualified joint and survivor annuity (QJSA), which is payable when the participant dies after retirement payments commence. Since the husband in the Lasche case died before receiving any retirement benefits from the plan, Sec. 205(a) of ERISA mandated that the wife receive a QPSA. This section provides the following:

(a) Each pension plan...shall provide thatÑ

(2) in case of a vested participant who dies before the annuity starting date and who has a surviving spouse, a qualified pre-retirement survivor annuity [QPSA] shall be provided to the surviving spouse of such participant.

The ERISA requirement quoted above was reflected in the brokerage firm's prototype plan document which the husband had adopted:

If the participant dies leaving a surviving spouse before his or her benefit commencement date, the participant's benefit shall be payable to the participant's surviving spouse in the form of an annuity for the life of the surviving spouse."

Thus, under the terms of ERISA and of the plan, the wife was absolutely entitled to the QPSA death benefit unless the wife waived that right. The procedural requirements for such a waiver are also set forth in Sec. 205 of ERISA.

Under Sec. 205(c), the waiver is effectuated by the participant electing to designate a beneficiary or beneficiaries other than the spouse. Such election, however, will only be enforceable if the following requirements are met:

* The spouse of the participant consents in writing to such election,

* Such election designates a beneficiary (or a form of benefits) which may not be changed without spousal consent (or the consent of the spouse expressly permits designations by the participant without any requirement of further consent by the spouse), and

* The spouse's consent acknowledges the effect of such election and is witnessed by a plan representative or a notary republic (emphasis added) [Sec. 205(c)(2)(A)-(iii)].

The Federal court found that the waiver language in the standard form provided by the brokerage firm was inherently defective, and that it had been defectively witnessed under the subsection quoted above. The form was inherently defective, in the Court's opinion, because the printed language failed to acknowledge the effect of the husband's election of the nonspouse beneficiaries. Relying on REA's legislative history, the Court held that the form could not "acknowledge the effect" unless it contained"...such information as may be appropriate to disclose to the spouse the rights that are relinquished."

A related issue that the Court did not discuss in its opinion, evolves from the fact that the spousal consent is irrevocable, as a matter of law. It could be argued that a spousal consent does not "acknowledge the effect" of the election unless the consent document advises the spouse that his or her consent is irrevocable.

The Federal court also held that the purported witnessing of the wife's signature did not satisfy the ERISA requirement that the consent be "witnessed by a plan representative or a notary public". That holding implies, without specifically stating, that ERISA requires the witness to be someone other than the plan participant that is making the election. While this requirement is not expressly stated in ERISA, it would appear to be extremely reasonable and is consistent with Congressional intent in enacting REA. To that end, it should be noted that many employee benefit practitioners recommend that all waivers be witnessed by a notary public, rather than a plan representative.

By the time the summary judgment motions were argued, the defendants appeared to have conceded that the waiver in the postnuptial agreement was not enforceable. In a footnote to the opinion, however, the Court concluded that the waiver clause in that agreement was not effective because it did not designate any beneficiary instead of the wife.

The Lasche decision is relevant in a number of ways. First, it highlights the specific issue of the technical requirements of spousal waivers. An estate plan may well presume that retirement funds will be distributed to someone other than the spouse, because a matrimonial agreement or a waiver form has ben executed. The Lasche decision demonstrates that the planner's intentions may not
be achieved if the documents have not been prepared competently and executed properly.

A more general lesson that is derived from the Lasche decision is that ERISA is a technical and highly complex statute, and that the courts will apply these technical rules very strictly. *

Iven R. Taub, JD, LLM, CPA, Richard H. Waxman, JD, and Jeffrey S. Kahn, JD, are members of the law firm of Kahn, Waxman & Taub, PC, the attorneys for the plaintiff in the Lasche case.

QTIP TREATMENT DISALLOWED

By Joseph S. Saslaw, CPA, Irsaeloff Trattner & Co.

Lucille P. Shelfer, a resident of Florida, died on January 18, 1989. At the time of her death, she was the beneficiary of a trust established under the will of her husband, who predeceased her in 1986. Under the terms of his will, the net income from the trust was payable quarterly to the decedent during her lifetime with no power in the decedent to compel distribution more frequently. The will did not require that all the income earned after the last distribution be distributed to her or her estate. Upon the death of the decedent, the principal and any undistributed income was to be paid to the niece of the decedent's husband.

The personal representative of the husband's estate filed a Federal estate tax return and elected to treat 54.273% of the assets of the trust as a QTIP and claimed a marital deduction for that percentage of the trust. The return was selected for examination by IRS, and an examination report was issued not only allowing the claimed percentage of 54.273, but increasing to 55.945%, the amount allowed as a marital deduction under the QTIP election.

When Lucille P. Shelfer died in 1989, her personal representative filed a Federal estate tax return which did not include in her gross estate the trust property for which a QTIP election had been made in her husband's estate. On audit, the IRS included in her gross estate the same percentage of the trust as was treated as QTIP in her husband's estate.

The IRS contended that the decedent had a qualifying income interest for life in the trust, and, consequently, the trust property must be included in the decedent's gross estate under IRC Sec. 2044. The estate argued that the trust was not QTIP, and, therefore, no part of it was includable in the decedent's gross estate, because the decedent was not entitled to all of the trust income during her lifetime.

After examining the provisions of the trust, the Tax Court held that the decedent did not have a qualifying interest for life because (according to the will) she was not entitled to the income accruing between the distribution date just prior to her death, and the date of her death. According to the court, even though the executor of the estate of the decedent's husband made a QTIP election, if that election was erroneous, the election was invalid. The court concluded that an erroneous election cannot qualify a trust for QTIP treatment. Thus, the Court followed its decision in Estate of Rose Howard, 91 TC 329, CCH Dec. 45,002, rev'd, CA-9, 90-2 USTC Par. 60,033, in which it held that a trust must provide that the income accumulated between the last distribution date and the surviving spouse's death must be paid to her estate or as the spouse directs in order for the trust to qualify for QTIP treatment.

According to the Court, the plain reading of IRC Sec. 2056(b)(7)(ii)(1) does not support any other reading.

Three separate dissenting opinions disagreed with the Court's interpretation of IRC Sec. 2056(b)(7). The decision in this case followed the decision in Howard, even though the IRS argued at the time that proposed regulations were pending that would allow a QTIP election notwithstanding that the accumulated income between the last income distribution and the date of death of the surviving spouse went to a person or persons other than the surviving spouse or her estate. According to the court, proposed regulations carry no more weight than an IRS position advanced on brief. At last, final regulations to IRC Sec. 2056(b)(7) have been enacted, effective for decedents dying after March 1, 1994:

An income interest does not fail to constitute a qualifying income interest for life solely because income between the last distribution date and the date of the surviving spouse's death is not required to be distributed to the surviving or the surviving spouse's estate.

Perhaps this will now dispel the ambiguity and uncertainty that has resulted in so much litigation. *

Editors:
Marco Svagna, CPA
Lopez Edwards Frank & Company

Edward A. Slott, CPA
E. Slott & Company

Contributing Editors:

Jeffrey A. Grossman, CPA
Goldstein Golub Kessler & Company P.C.

Richard H. Sonet, CPA
Zeitlin Sonet Hoff & Company

Joseph V. Falanga, CPA
Goldstein Golub Kessler &Company P.C.

Larry M. Elkin, CPA
Own Account

SEPTEMBER 1995 / THE CPA JOURNAL