As an attorney who prepares comprehensive estate plans and administers wills and trusts after death, I see questions raised at all phases about who are the beneficiaries of the accounts and who should be in a comprehensive estate plan.
The preparation and administration of estate plans, wills and trusts can be plagued with questions about the beneficiaries of the accounts. Many people are not sure who the beneficiaries of certain accounts are or should be and are at risk of encountering certain laws that override their wishes.
Every estate plan and estate management is unique, so there is no single answer to who should be the beneficiary of an account, but most of my clients would not want an ex-spouse to inherit their children or other loved ones.
How assets are transferred upon death
Assets are transferred in many ways when a person dies. Some assets are transferred by law to a surviving joint owner, such as a house. Some assets are transferred through a last will and testament as part of the probate process, think of an individually owned investment or bank account. Assets such as life insurance and retirement accounts are transferred by designated beneficiary while others are transferred through trusts. Reviewing the different ways assets can be transferred should be part of your comprehensive estate plan, as should updating the plan from time to time or when a major life event occurs (divorce, birth, adoption, for example).
When was the last time you reviewed your estate plan to make sure all of your assets are going to the right people in the most tax-advantaged and creditor-protected way?
Unfortunately, I discovered, sometimes too late, that many of my estate planning and wealth management clients have a former spouse named as a beneficiary on certain accounts.
What happens after divorce?
There is no universal rule about who gets life insurance after a divorce. Factors like the type of policy, the state where the policy was issued, where the couple lived, and the language in the divorce decree will all come into play when it comes time to pay the life insurance benefit.
First, it must be determined whether the insurance policy is governed by state law or federal law. Many states have enacted laws that ensure that a former spouse automatically loses her designation as a beneficiary on life insurance policies. Policies governed by federal law that preserve designations of former spouses will not be subject to automatic revocation. Second, a divorce decree must be reviewed to determine if it falls within the definition of a qualified domestic relations order. Finally, in beneficiary dispute cases, the circumstances surrounding the beneficiary change must be investigated to ensure that there has been no improper influence or fraud. All of these preliminary steps must be taken to properly handle competing claims.
Will my divorce decree not nullify a designated beneficiary?
Yes and no. A divorce decree can nullify a beneficiary designation on a life insurance policy only in cases where the divorce decree (most often a state court order) is not invalidated by the laws that control the life insurance policy. life insurance itself. Certain federal laws governing federal life insurance policies may supersede conflicting state law documents, including divorce decrees.
ERISA was amended in 1984 to provide greater protection for spouses and dependents after a divorce. One of the protections was an exception to the general priority rule for qualified domestic relations orders (QDROs). QDRO is a state order/divorce judgment related to child support, marital property rights, or alimony. The order must meet several requirements to be valid. Recovering the life insurance benefit after it has been awarded to the wrong party can be challenging and could result in lengthy litigation.
As a federal law, ERISA will take precedence over any state law. This means that if the state in which the deceased lived has automatic revocation laws, the former spouse may still be entitled to the death benefit.
State and Federal Law Issues
First, if the former spouse is automatically revoked as beneficiary, it does not mean that the person the individual chooses as beneficiary will receive the money. Sometimes the insurer will pay the secondary beneficiary (if any) or the insured’s estate. Sometimes the insurance company will follow a precedence chart in its own policy to name the person who is paid next. The second problem with reliance on such laws is that they do not control all life insurance claims. Many life insurance claims are governed by federal laws that take precedence over state laws, as noted above.
Also, if the insured created a will or trust after a divorce and included their life insurance policy in it, but did not update a beneficiary on their policy, the existing beneficiary may have a valid claim for the life insurance money. life after the death of the insured. . The situation can be even more complex if a life insurance policy is a group policy and is governed by federal law.
Update your beneficiary designations and review your estate plan
To avoid potential problems and confusion, we encourage anyone going through a major life change to consult with an experienced probate attorney who will help navigate the complexities of updating an estate plan. These include asset titling and designated beneficiaries to ensure that neither state nor federal law controls these designations and that your loved ones are not in court fighting over who should be the beneficiary of your life insurance policy.
A policy or account with the wrong beneficiaries, or worse, no beneficiaries, can lead to big problems down the road, many of which can be fixed long before it’s time to pay benefits.
Now stop reading and review your beneficiary designations; If your estate plan was written more than 5 years ago, or you recently had a major life event, call your estate attorney and ask them to review it and help you update your plan if needed.