What Can We Learn From a Grandfather’s Inheritance?

Edward S. Lyon, a former University of Chicago employee, died in 2019 with a retirement account worth around $1.7M listing his spouse, Valerie as his beneficiary. Prior to his death, Lyon updated his beneficiary form and replaced Valerie with a trust intended to leave his retirement account for the benefit of his 36 grandchildren (so far so good). In order to change the beneficiary from Valerie to anyone other than Lyon’s spouse, Lyon submit the required spousal waiver…..signed by Valerie’s power of attorney.

Since the spousal waiver form was signed by Valerie’s power of attorney and not by Valerie herself, the retirement account administrator would not release the funds to the trust (the grandchildren) and litigation ensued. The administrator argued that Valerie’s power of attorney document did not give her agent the specific authority needed to waive her survivor benefits. And guess what, the courts agreed with the administrator and held that the trust (grandchildren) were not the beneficiaries of the retirement account.

So, what can we learn from this form over function grandparent issue?

We can talk all about spousal waivers. ERISA (the Employee Retirement Income Security Act of 1974) has strong spousal protection rules for certain retirement plans. The basic idea is that if a participant is married, the spouse often has a federally protected right to receive survivor benefits unless the spouse properly waives that right.

A valid spousal waiver usually needs to be (1) in writing; (2) signed by the spouse; (3) witnessed by a plan representative or notary public; (4) made after the spouse receives enough information to understand what is being waived; (5) specific enough to consent to the alternate beneficiary or alternate form of benefit; (6) made during the applicable election period under the plan/ERISA rules.

For these retirement accounts, a spouse is not just another beneficiary, they have federal survivor rights that cannot be erased by a will, trust, handwritten note, beneficiary form, or family “understanding.”

So, there you have it. We learn that when it comes to most retirement plans, it’s very hard to disinherit your spouse (unless they properly give consent). We also learn that while the last will or trust may say one thing, retirement accounts follow their own beneficiary forms, guidelines and plan rules.