“Just the place for a Snark! I have said it thrice:

What I tell you three times is true.”

— Lewis Carroll, 'The Hunting of the Snark'

 

In my probate practice, I am observing an increasing number of cases where the beneficiary designation on a decedent’s retirement plan conflicts with an agreement reached between the decedent and their spouse or ex-spouse.¹ The pattern is now familiar: the parties enter into either a prenuptial agreement or a marital dissolution agreement (MDA) that includes provisions regarding the disposition of their retirement plans upon their deaths, but subsequently never change the beneficiary designations on file with the plan administrators to reflect the agreement. One party dies and their retirement plan is payable (or actually paid, if not caught in time) to the decedent’s spouse or ex-spouse, to the chagrin of the decedent’s intended beneficiaries. The surviving spouse’s or ex-spouse’s response is usually along the lines of, “They didn’t change the beneficiary designation, so they must have wanted me to have it.”

What controls entitlement to the retirement benefits: the beneficiary designation or the parties’ agreement? The answer: it depends. Tennessee courts look to the terms of the retirement plan to determine whether a purported change of beneficiary was effective. The usual result is that courts enforce the beneficiary designation on file with the plan administrator at the decedent’s death, regardless of what the decedent may have intended. However, Tennessee courts have effectuated a change in beneficiary after the decedent’s death when it is sufficiently clear from the parties’ agreement that a party intended to relinquish their status as beneficiary and has an ongoing duty to do whatever is required to accomplish that intent.

Three Cases: Looking to the Plan Terms

The general rule in Tennessee is that a beneficiary designation may be changed only by substantially complying with the terms of the relevant retirement plan. The seminal case is Bowers v. Bowers.² In Bowers, the decedent’s ex-spouse remained the designated beneficiary of the decedent’s life insurance policy when the decedent died 34 days after their divorce. The parties’ MDA contained a broad provision whereby they agreed to “relinquish[] to the other any rights or claims not provided for herein . . .”³ The decedent’s heirs asked the court to construe such language as effectuating a release of the ex-spouse’s entitlement to life insurance proceeds. The Tennessee Supreme Court held that the ex-spouse’s status as beneficiary of a life insurance policy was not a right or claim arising out of the marital relationship but rather a right that arose under the terms of the insurance contract, and, therefore, ruled that the release included in the property settlement agreement was inapplicable to the insurance policy.⁴

In In re Estate of Williams, the decedent’s ex-wife remained the named beneficiary of the decedent’s annuities when the decedent died 54 days after their divorce.⁵ His estate argued that because the parties’ MDA listed the annuities and awarded them to the decedent “free of any claim by Wife,” the ex-wife relinquished her status as beneficiary of the annuities.⁶ The court disagreed, holding that, “There is nothing about the language in the MDA to make inapplicable the principles discussed [in Bowers] . . . [T]he fact remains that no attempt was made to change the beneficiary in compliance with the annuity contract provisions.”⁷ Judgment was affirmed for the ex-wife.⁸

In Voya Ret. Ins. & Annuity Co. v. Johnson, the decedent’s ex-wife and estate both claimed an interest in his retirement plan benefits.⁹ Although the ex-wife was listed as the designated beneficiary, the estate claimed that the beneficiary designation had been revoked based on language in the parties’ MDA that provided, “The parties agree that the Husband shall be awarded all right, title and interest in [his] retirement/pension accounts . . .”¹⁰ The court cited Bowers in holding that, while the general release language in the MDA extinguished any marital right the ex-spouse had in the plan, it was not sufficient to revoke the ex-spouse’s right to receive plan benefits, since said right depended solely on the plan terms.¹¹ The court further held that, even if the language had been sufficient to revoke the beneficiary designation, the decedent did not send the MDA to the plan administrator and the court would not enforce “a mere unexecuted intention to change” a beneficiary designation.¹² The ex-spouse was granted judgment for the disputed death benefit.¹³

Three Cases: Considering the Spouses’ Agreement

Although Tennessee courts generally do not enforce an unexecuted intent to change a beneficiary, the parties’ agreement regarding disposition of retirement benefits has been enforced after the decedent’s death under certain circumstances.

In Lunsford v. Lunsford, the decedent left his ex-wife as the named beneficiary of his retirement plan.¹⁴ The court recognized that, like in Bowers, the decedent never communicated with the plan administrator concerning changing the designated beneficiary to remove his ex-wife.¹⁵ The court found that the difference from Bowers was twofold: (1) it was clear from the language in the MDA that the ex-wife intended to relinquish her status as beneficiary of the retirement plan, and (2) the MDA contained a continuing duty for the parties to execute whatever documents that may be required to accomplish the purpose and intent of the MDA.¹⁶ This continuing duty, the court reasoned, gave the decedent’s personal representative the right to enforce the ex-wife’s relinquishment of the decedent’s retirement benefits by way of a qualified domestic relation order (QDRO).¹⁷

In Manning v. Manning, the parties agreed in an MDA to waive any interest they had in the other’s retirement plan and agreed to execute whatever documents may be required to accomplish the purpose and intent of the MDA.¹⁸ The court found that, although the decedent had failed to remove his ex-wife as the named beneficiary of his retirement plan, his failure did not evidence intent to modify the MDA considering the parties’ continuing obligations to waive any right they may have in the other’s retirement.¹⁹ The court held that the case was more akin to Lunsford than Bowers and directed entry of summary judgment in favor of the decedent’s estate.²⁰

This year the Court of Appeals considered another agreement pertaining to the disposition of a retirement plan. In Edward Jones Tr. Co. v. Woods, the decedent designated his trust as the beneficiary of his retirement plan before he was married.²¹ The plan terms provided that, if the participant married, the new spouse automatically became the sole primary beneficiary unless a new beneficiary designation form was completed. After he married, the decedent never completed a new beneficiary designation form to remove his new spouse as beneficiary of the plan. Thus, when the decedent died three years later, the plan benefits were paid to the widowed spouse. The decedent’s estate filed suit against the widow arguing that her refusal to turn the benefits over to the estate amounted to a breach of the parties’ prenuptial agreement.

The prenup provided that “[e]xcept as hereinafter set forth, each party hereby disclaims as to the Separate Property of the other all marital rights and rights of descent and distribution . . .” and identified the retirement plan among the decedent’s separate property.²² However, the prenup also contained the following exception: “each party does hereby waive any rights as a surviving spouse to the pension benefits or other similar benefits of the other party, except to the extent that such benefits may be payable only to a surviving spouse.”²³

The court ruled that the agreement was ambiguous for a number of reasons, including: (1) whether the parties intended the exception to apply to separate property; (2) whether they intended the exception to apply only to those benefits that could not be paid out, under any circumstance, to anyone other than a surviving spouse; and (3) at what point in time the parties intended for “payable only to a surviving spouse” to be measured (at the time the agreement was executed, or on death).²⁴ The court remanded the case to the trial court for an evidentiary hearing to determine the parties’ intent.²⁵

Notably absent from the Edward Jones decision is any reference to Bowers, Voya, Lunsford or Manning. Presumably, the ambiguity in the parties’ intent must be resolved first. If the trial court finds in favor of an intended disclaimer, it must then determine whether the agreement gives the representative of the decedent’s estate the right to effectuate a change in the plan’s designated beneficiary. In that regard, we may see this case again.

Practice Tips

Considering the caselaw, how can drafters of pre/postnuptial agreements and marital dissolution agreements potentially avoid the ire of a deceased client’s intended beneficiaries?

1.

Clarify in your engagement letter whether your representation extends to matters that arise after the agreement is executed. For example: “After you have executed your prenuptial agreement, we will not have any responsibility to assist you in effectuating the agreement, including, for instance, providing assistance in changing beneficiary designations, unless you ask us and we agree to do so.”

Either way, make sure your client knows that they may need to take additional steps to effectuate the agreement after it is executed. Consider at least including a reminder like the following in your closing letter: “As we discussed, there still may be some important things for you to do to make this agreement fully effective, such as changing beneficiary designations on your retirement plans. We are happy to help in any way needed, but as we agreed in the terms of engagement when we began our representation, we are not responsible to follow up with you on those matters unless you request our help.”

2.

Draft your agreements presuming your client will not change the beneficiary designation on their retirement plan. In other words, position your client’s estate for a breach of contract action against an uncooperative surviving spouse/ex-spouse. Particularly, make sure to include language that (1) clearly evinces each party’s intent to relinquish their status as beneficiary of the other’s retirement plan and (2) contains an ongoing duty to execute whatever documents may be required to accomplish that intent. As a general example for an MDA:

Each party relinquishes their status as beneficiary under the retirement plan of the other party, even if said party is specifically named as a beneficiary on said plan and even if their name remains on said plan after the divorce is granted. The failure of a party to change the beneficiary designation on their retirement plan after the divorce is granted shall not be considered a modification of this agreement. The parties agree that each shall execute and deliver whatever documents may be required in the future to accomplish the purposes heretofore stated.

3.

To the extent the parties intend to retain rights in benefits payable only to surviving spouses, clearly provide whether that exception extends to separate property. For example, if the spouses wish to only retain governmental benefits payable to spouses, you could provide:

This Agreement shall not affect either party’s right or rights as a spouse or surviving spouse to any financial or other benefits payable by a governmental entity under any federal, state or local governmental program, to the extent that such rights in all circumstances are available only to a spouse or surviving spouse. This provision does not give the spouse or surviving spouse any rights in any separate property of the other party relinquished or disclaimed elsewhere in this Agreement.

Additional Clarity Can’t Hurt

Even the best laid plan can go awry if the client doesn’t understand what’s needed to effectuate it. Providing some additional clarity, and making a few follow up calls to the client, can go a long way to ensure our clients’ intentions are fulfilled. |||

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MICHAEL CROWDER is a shareholder of Kennerly Montgomery in Knoxville. He is a graduate of Princeton University and University of Tennessee College of Law. As a trusts and estates attorney, he regularly handles T&E issues that are being newly tested and defined amid the ongoing Great Wealth Transfer.

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NOTES

1. Including, but not limited to, IRAs and qualified plans like 401(k)s and 403(b)s. In this context, our courts also draw no distinction between annuity contracts, retirement plans, and life insurance policies. See Voya Ret. Ins. & Annuity Co. v. Johnson, 2017 Tenn. App. LEXIS 716, *8 (Tenn. Ct. App. 2017).
2. Bowers v. Bowers, 637 S.W.2d 456 (Tenn. 1982)
3. 637 S.W.2d at 457.
4. Id., at 459.
5. 2003 Tenn. App. LEXIS 313, *49-51 (Tenn. Ct. App. 2003).
6. Id., at *52.
7. Id., at *56-57.
8. Id., at * 52.
9. 2017 Tenn. App. LEXIS 716 (Tenn. Ct. App. Oct. 27, 2017), cert. denied 2018 Tenn. LEXIS 135 (Feb. 14, 2018).
10. Id., at *8.
11. Id., at *9-10.
12. Id., at *10-11.
13. Id., at *13.
14. 2005 Tenn. App. LEXIS 649 (Tenn. Ct. App. 2005).
15. Id., at *8.
16. Id., at *8-9.
17. Id., at *9.
18. 2016 Tenn. App. LEXIS 448 (Tenn. Ct. App. 2016).
19. Id., at *12.
20. Id. To effectuate the change in beneficiary contemplated by the MDA, the administrator of the estate requested an order requiring the ex-wife execute a waiver and direct the plan administrator to disburse the benefits to the estate. Id., at *3.
21. 2024 Tenn. App. LEXIS 242 (Tenn. Ct. App. May 31, 2024).
22. Id., at *12-13.
23. Id., at *14 (emphasis added).
24. Id., at *14-15.
25. Id.