Clarify Inheritance Account Rules

Section two of this bill provides that this act shall take effect imme- diately and shall apply to the estates of decedents dying on and after such date.

Justification

The surviving spouse's right of election has existed in New York law for almost 90 years. See, Ch. 229, L.1929. The current right of election was enacted as Chapter 595 of the Laws of 1992. In 1992, statutory language concerning retirement benefits as testamentary substitutes was changed from "(n)othing in this paragraph shall affect, impair or defeat the right of any person entitled to receive (A) payment in money, securities or other property under a thrift, savings, pension, retirement, death benefit, stock bonus or profit-sharing plan, system or trust..." (EPTL § 5-1.1(b)(E)) to "any money, securities or other property payable under a thrift, savings, retirement, pension, deferred compensation, death bene- fit, stock bonus or profit-sharing plan, account, arrangement, system or trust, except that with respect to a plan to which subsection (a) (11) of section four hundred one of the United States Internal Revenue Code applies or a defined contribution plan to which such subsection does not apply pursuant to paragraph (B) (iii) thereof, only to the extent of fifty percent of the capital value thereof." (EPTL § 5-1.1-A(b)(1)(G)).

The current definition of testamentary substitute is not as broad as the previous definition. The exemption language in the Estates, Powers and Trusts Law section 51.1-A relies on the applicability ERISA's joint and survivor annuity requirement to defined benefit plans to determine whether distributions from a defined benefit plan are a testamentary substitute. Internal Revenue Code section 401(a)(11) is inapplicable to governmental plans because, when enacting ERISA, the focus of Congress was on private retirement plans. See, Feinstein v. Lewis, 477 F. Supp. 1256 (S.D.N.Y. 1979). Among the many reasons why governmental plans were specifically excluded from many of the ERISA provisions was the thought that "'State and local governments must be allowed to make their own determination of the best method to protect the pension rights of municipal and state employees." Gualandi v. Adams, 385 F.3d 236 (2d Cir. 2004) quoting 119 Cong. Rec. 741 (statement of Sen. Bentsen). Thus, it is up to the State to determine how the rights of retirement plan members and beneficiaries should be protected.

To determine how best to protect the retirement benefit rights public employees and their beneficiaries, we need to look at ERISA and the significant amendments to ERISA made by the Retirement Equity Act of 1984, Public Law 98-397, 98 Stat 1426 ("REA"). Among the issues that REA sought to address was "(c)onfusion ... over whether ERISA preempted State divorce laws, thereby preventing pension plans from complying with domestic relations court orders allocating to a spouse a portion of the worker's pension as part of a property settlement." Social Security Bulletin, Vol. 48, No. 5, p.38 (May 1985). Much of this confusion arose from a split in the Courts with regard to whether ERISA's spendthrift provisions would trump a domestic relations order issued by a State court in a divorce proceeding that distributed pension benefits to a pension plan participant's former spouse. See, Id. at 43; See also, 26 USC 401(a)(13) and 29 USC 1065(d). REA cleared up this confusion by creating an exception to ERISA's spendthrift provisions for a qualified domestic relations order, which is a domestic relations order that meets certain requirements. See, 26 USC 414(p). A domestic relations order is defined as "any judgment, decree, or order (including approval of a property settlement agreement) which- (i) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant, and (ii) is made pursuant to a State domestic relations law (including a community property law)." 26 USC 414(p)(1)(B). As with ERISA, this provision of REA did not apply to governmental plans.

Without ERISA and REA to lean on, former spouses and beneficiaries who have a domestic relations order or property settlement agreement that includes a distribution from a governmental retirement plan are finding themselves fighting for the retirement plan benefits afforded them by the domestic relations order or property settlement agreement when the governmental retirement plan participant dies. While it appears that the Courts have had infrequent opportunities to resolve the question of whether a distribution from a governmental retirement plan that is made pursuant to either a domestic relations order or a property settlement agreement constitutes a testamentary substitute under Estates, Powers and Trusts Law section 5-1.1-A(b)(1)(G), Surrogate's Court in Bronx County has had occasion to determine this issue.

In Matter of Calligaro, 19 Misc 3d 895 (Surr. Ct. Bronx Co. 2008), the decedent's surviving spouse sought to exercise her right of election against the decedent's NYCERS retirement benefits that were, in accord- ance with a separation agreement, being distributed to the decedent's minor daughter from his first marriage until she reached the age of majority. Here, the Court held that the surviving spouse was entitled to an elective share of the decedent's retirement benefits that are payable after his minor daughter reached the age of majority. The Court further held that the surviving spouse does not have the right to elect against any benefits payable during the decedent's daughter's minority because her right to such payments is derived from a separation agreement that she could have enforced against the decedent if he had not designated her as the beneficiary of the retirement benefits as required by the separation agreement. See, EPTL 5-11-A(b)(5). The decision in Calligaro

is consistent with the Court of Appeals decision in Kaplan v. Kaplan, 82 NY 2d 300 (1993).

The dissolution of a marriage and the division of martial assets is a difficult and frequently emotional process. When a property settlement agreement or domestic relations order requires one former spouse to designate his or her former spouse or children from their marriage as the beneficiary or beneficiaries of his or her retirement benefits, it should not matter that the retirement plan is a governmental plan. The beneficiary who was designated pursuant to such agreement or order should not have to expend additional resources to secure the benefit granted to him or her once the retirement plan member dies.

This legislation provides clarity in a murky area by expressly providing that distributions from a governmental plan that are made pursuant to a domestic relations order or property settlement agreement are not a testamentary substitute pursuant to Estates, Powers, and Trusts Law section 5-1.1-A(b)(1)(G).

Legislative history

New bill

Fiscal implications

None to the State

Effective date

This act shall take effect immediately and shall apply to the estates of decedents dying on and after such date.