Don’t Forget to Update Beneficiaries After a Gray Divorce

A financial adviser walks an older man through some paperwork in her office. — (Image credit: Getty Images)

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.

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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.”