Editor’s note: This is part three of an ongoing series throughout this year focused on helping older adults navigate the financial difficulties of gray divorce. See below for links to the other articles in the series.
If you're fortunate enough to have a conscientious financial adviser, you've probably been reminded that it is a good idea to periodically check your beneficiaries on all your investment and retirement accounts and life insurance policies.
For people going through mid- to late-life divorce, it's even more important.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
While family law attorneys obviously focus on the division of assets between parties while they're still alive, consideration must be given to what might happen to those assets upon a party's death, either during or after the divorce process, the likelihood of which obviously increases for people getting divorced later in life.
Amanda Wedl, an estate planning attorney in Nevada, insists, “Don't depend on your divorce decree to solve or to be your estate plan. Empower yourself to be sure your goals are being addressed.”
Wedl recommends meeting with an estate planning attorney soon after divorce to ensure your plan is updated to meet your needs.
Update your beneficiaries
Estate planners advise not to rely on revocation upon divorce statutes. Such statutes exist to revoke a spouse as a beneficiary in the event of divorce. These statutes are meant to protect what might simply be an oversight after dealing with the emotional trauma of divorce. The assumption is that the decedent intended to remove the former spouse as beneficiary from various financial accounts post-divorce but forgot to do so.
Today, more than 40 states have some type of revocation upon divorce statute that impacts beneficiaries listed on IRAs, bank accounts, insurance policies, trusts and wills. Of these 40 states, 26 automatically revoke a spouse as a beneficiary in the event of divorce.
But watch out! Automatic beneficiary revocation laws do not apply to Employee Retirement Income Security Act (ERISA) and federal life insurance and retirement benefits.
The rules are different for 401(k) accounts, pensions and other federal plans under the ERISA laws. In these cases, pre-divorce designations typically remain in place until you change them — no matter what state you live in. ERISA supersedes state laws as they relate to retirement plans.
“ERISA cannot be held to interpret all 50 states’ laws and types of property settlement agreements,” says Wedl. “The ERISA plan document controls.”
Sometimes waivers are put in place
Despite ERISA plan documents controlling the distribution of assets upon death, many attorneys rely on client waivers in the divorce decree. Waivers are often used in divorce when both parties have similar retirement benefits or when 100% of another marital asset — for instance, the house — is being used to offset another spouse’s employer-sponsored retirement plan.
If there are waivers in property settlement agreements, the question arises whether these waivers are sufficient to waive any survivorship benefits associated with either defined contribution or defined benefit plans.
This question was addressed in 2009 by the U.S. Supreme Court in Kennedy v Plan Administrator for DuPont Savings and Investment Plan. In this case, Mr. Kennedy was a participant in the DuPont Savings and Investment Plan, a defined contribution plan governed by ERISA. In their divorce decree, Mrs. Kennedy waived her interest in the plan. After Mr. Kennedy died in 2001, it was noted that he never changed the original beneficiary designation on the plan account, nor was there a contingent beneficiary listed. DuPont thus transferred the retirement account to Mrs. Kennedy, despite the fact she long ago waived her interest in the plan. Mr. Kennedy's estate challenged the award, but the Supreme Court ultimately found for Mrs. Kennedy despite her having waived an interest in it decades previous.
Attorney Lindsay Childs in her book Divorce in the Golden Years points out that unless lawyers know what the specific plan documents require and follow through with clients to ensure that all necessary steps are taken to waive any survivorship benefits, general waivers of these types are not going to be effective to waive these interests. The only practical way to deal with the issue is to include language in property settlement agreements notifying clients of their responsibilities under their plan’s documents.
Wedl notes another potential drawback of state automatic revocation laws. “Maybe you do want your ex-spouse involved. Some divorces are more amicable, and the relationship will continue afterwards. Make sure your estate planning documents reflect that. Don't leave it up to your state to determine your estate plan.”
OTHER ARTICLES IN THIS SERIES
- Introduction: Happy New Year: Let’s Get a Divorce
- Part one: How Does a Gray Divorce Affect Social Security Benefits?
- Part two: In Gray Divorce, Two Financial Planning Yardsticks Are Key
Related Content
- A Financial Guide to Gray Divorce
- Four Steps to Prepare Your Finances for Divorce
- Five Tips if You’re Getting Divorced in 2024
- You’re Divorcing or Lost Your Spouse: What Do You Do Financially?
- Beware of These Three Hidden Costs of Divorce
-
Cord Cutting Could Help You Save Over $10,000 in 10 YearsHow cutting the cord can save you money and how those savings can grow over time.
-
The '8-Year Rule of Social Security' — A Retirement RuleThe '8-Year Rule of Social Security' holds that it's best to be like Ike — Eisenhower, that is. The five-star General knew a thing or two about good timing.
-
You Were Planning to Retire This Year: Should You Go Ahead?If the economic climate is making you doubt whether you should retire this year, these three questions will help you make up your mind.
-
Are You Owed Money Thanks to the SSFA? You Might Need to Do Something to Get ItThe Social Security Fairness Act removed restrictions on benefits for people with government pensions. If you're one of them, don't leave money on the table. Here's how you can be proactive in claiming what you're due.
-
From Wills to Wishes: An Expert Guide to Your Estate Planning PlaybookConsider supplementing your traditional legal documents with this essential road map to guide your loved ones through the emotional and logistical details that will follow your loss.
-
Your Home + Your IRA = Your Long-Term Care SolutionIf you're worried that long-term care costs will drain your retirement savings, consider a personalized retirement plan that could solve your problem.
-
I'm a Financial Planner: Retirees Should Never Do These Four Things in a RecessionRecessions are scary business, especially for retirees. They can scare even the most prepared folks into making bad moves — like these.
-
A Retirement Planner's Advice for Taking the Guesswork Out of Income PlanningOnce you've saved for retirement, you'll need your nest egg to support you for as many as 30 years. For that, you need a clear income strategy, not guesswork.
-
Why Smart Retirees Are Ditching Traditional Financial PlansFinancial plans based purely on growth, like the 60/40 portfolio, are built for a different era. Today’s retirees need plans based on real-life risks and goals and that feature these four elements.
-
To My Small Business: Well, I've Been Afraid of Changin', 'Cause I've Built My Life Around YouWhile thinking about succession planning might feel like anticipating a landslide (here's to you, Fleetwood Mac), there are strategies you can implement to manage the uncertainty and the transition.
