There appears to be a movement afoot to add qualified domestic relations orders (QDROs) as a basic estate planning tool. Admittedly, the use of QDROs could be useful in a few estate planning contexts, such as when a client wants to delay the age deadline for taking required minimum distributions by moving funds to a younger spouse, or when a client wants to remove funds from one spouse’s estate for Medicaid planning purposes. But is it legal? Clients and practitioners should tread very carefully.
For those unfamiliar with QDROs, these are court or administrative orders, decrees, or judgments issued in the context of domestic relations matters, such as divorces, legal separations, or child support cases. These orders require the administrator of a qualified retirement plan (e.g., a 401k) to assign a portion of the plan to another person. This is very useful, for example, at the end of a marriage when assets need to be divided. Ordinarily, the law that governs qualified retirement plans, known as the Employee Retirement Income Security Act (ERISA), prohibits a person from assigning his or her rights in a plan to another person. An important exception is for QDROs.
However, ERISA demands that QDROs meet certain requirements. Chief among these is that the order be entered pursuant to a state’s domestic relations law. See 26 U.S.C. § 414(p)(I)(B)(ii) (“The term ‘domestic relations order’ means any judgment, decree, or order … which … is made pursuant to a State domestic relations law….”). Absent an order issued under Washington’s domestic relations law in Chapter 26 RCW, it’s unclear how a QDRO would meet this important requirement.
Washington has a comprehensive set of statutes governing disputes and issues involving trusts and estates referred to as the Trust and Estate Dispute Resolution Act (TEDRA). Chapter 11.96A RCW. This chapter of Washington’s probate code allows parties interested in an estate or trust to enter into agreements that resolve issues and disputes between them. TEDRA is broad enough to capture all matters “with respect to any … property interest passing at death.” RCW 11.96A.030(2)(a). The agreements reached under this law do not require a court’s approval. Nevertheless, the agreements can be filed with the court and have the effect of a court order. See RCW 11.96A.230(2). Such agreements, however, are not domestic relations orders. They are entered pursuant to Washington’s probate code, not Washington’s domestic relations law. Therefore, such orders would not appear to meet the definition of a QDRO under ERISA.
Until this issue is resolved, clients and practitioner should be very careful. Questionable tax avoidance and mitigation schemes have a way of spreading for a while only to be crushed after a few years by the IRS. The net result is often financial harm to average people who have limited resources to absorb the blow. The use of QDROs in estate planning may be another variation on this theme.