The $300,000 blunder

Stepchildren might not have the same legal standing as biological children if beneficiary forms don't make that clear.

In a recent case, the 5th U.S. Circuit Court of Appeals ruled that a retirement plan administrator didn't abuse her discretion in concluding that stepsons weren't “children” under the terms of their stepfather's employer retirement plan. As a result, when John Hunter, a plan participant, died with no beneficiary, his stepchildren were disinherited and other family members got the money — $300,000 under the plan's default-beneficiary rules.

He retired from Marathon Oil Co. and participated in the company's qualified retirement plan. The plan allowed Mr. Hunter to name a primary and secondary beneficiary.

He named his wife, Joyce Hunter, as primary beneficiary but didn't name a contingent beneficiary. After she died in 2004, he didn't update his plan beneficiary form.

Mr. Hunter died in 2005.

Because he died without a living primary or contingent beneficiary, his plan defaulted to one of five beneficiaries in the following order: his surviving spouse, surviving children, surviving parents, brothers and sisters, and his estate.

Because Mr. Hunter's wife was already deceased, the plan's next default beneficiary was his surviving children. He didn't have any biological or legally adopted children, but he did have two stepsons, Stephen and Michael Herring.

Under the terms of the plan, because Mr. Hunter's wife had predeceased him, he had no biological or legally adopted children, and he had no surviving parents, the plan distributed the funds to the next category of default beneficiaries — his six brothers and sisters.

The stepsons later challenged the distribution, arguing that they were Mr. Hunter's “children” and should have received the $300,000. They cited their close relationship with him, the fact that he left his estate to them and the fact that he referred to them as his “beloved sons” in his will.

If Mr. Hunter named them as contingent beneficiaries, the stepsons could have inherited the retirement plan assets.The failure to name a contingent beneficiary could have been fixed if the retirement plan beneficiary form simply had been updated.

When there is no beneficiary named on the plan beneficiary form, the retirement plan documents dictate who gets the money by default.

Source:  Ed Slott, Investmentnews.com

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