The preparation and administration of estate plans, wills and trusts can be littered with questions concerning account beneficiaries. Many individuals are not sure who the beneficiaries of certain accounts are or should be, and run the risk of encountering certain laws that overrule their wishes.

Each estate plan and each estate administration is unique so there is not a one-size-fits-all answer about who should be a beneficiary on an account, but most of my clients would not want an ex-spouse to inherit over their children or other loved ones.

How Assets Transfer At Death

Assets transfer in many ways when a person dies. Some assets transfer by law to a surviving joint owner, such as a home. Some assets transfer through a last will and testament as part of the probate process, think an individually held bank or investment account. Assets such as life insurance and retirement accounts transfer by beneficiary designation while others transfer through trusts. Reviewing the different ways assets can be transferred ought to be part of your comprehensive estate plan, as should updating the plan sporadically or when a major life event (divorce, birth, adoption, for example) takes place..

When is the last time you reviewed your estate plan to make sure all of your assets go the right people in the most tax advantaged and creditor protected way?

Unfortunately, I have found—sometimes too late—that many of my estate planning clients and estate administration clients have an ex-spouse named as a beneficiary on certain accounts.

What Happens After Divorce?

There is no universal rule on who receives life insurance after divorce. Factors such as the type of policy, the state where the policy was issued, where the couple lived, and the language in the divorce decree will come into play when it is 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 ensuring that a former spouse automatically loses his/her designation as a beneficiary on life insurance policies. Policies governed by federal laws preserving ex-spouses’ designations will not be subject to automatic revocation. Second, a divorce decree must be analyzed to determine whether it falls under the definition of a qualified domestic relations order. Finally, in beneficiary dispute cases, the circumstances surrounding beneficiary change must be investigated to ensure there was no undue influence or fraud. All these preliminary steps must be taken in order to handle competing claims properly.

Won’t My Divorce Decree Override a Named Beneficiary?

Yes and no. A divorce decree can override a beneficiary designation in a life insurance policy only in cases where the divorce decree (most of the time a state court order) is not preempted by laws controlling the life insurance policy itself. Certain federal laws governing federal life insurance policies can trump conflicting state law documents, including divorce decrees.

ERISA

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 preemption rule for qualified domestic relations orders (QDRO). QDRO is a state order/divorce decree relating to child support, marital property rights or alimony. The order must meet several requirements to be valid. Recovering the life insurance benefit after it’s been given to the wrong party may be challenging and could result in a lengthy litigation.

As a federal law, ERISA will preempt any state law. This means that if the state the decedent lived in has automatic revocation laws, the ex-spouse might still be entitled to the death benefit.

State and Federal Law Problems

First, if the ex-spouse is automatically revoked as the beneficiary, it does not mean that the person the individual chooses as the beneficiary will actually receive the money. Sometimes, the insurer will pay to the secondary beneficiary (if there is one) or to the estate of the insured. Sometimes the insurance company will follow a table of precedence in its own policy to name the individual who is the next in line to receive the payout. 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 trump state laws as mentioned above.

In addition, if the insured created a will or a trust after a divorce and included his life insurance policy in them, but failed to update a beneficiary on his policy, the existing beneficiary may have a valid claim for life insurance money after the insured’s death. The situation may be even more complex if a life insurance policy is a group policy and is governed by federal laws.

Update Your Beneficiary Designations and Review Your Estate Plan

To avoid potential problems and confusion, we recommend everyone going through a major life change consult with an experienced estate attorney who will help them sort through the intricacies of updating an estate plan. These include the titling of assets and named beneficiaries to ensure that neither state or federal law control these designations and your loved ones do not find themselves in court fighting over who should be the beneficiary of your life insurance policy.

A policy or account with incorrect, or worse still, no beneficiaries, can lead to huge problems down the road—many of which can be fixed well before the time comes to pay out the benefits.

Now stop reading and go check your beneficiary designations; if your estate plan was drafted more than 5 years ago, or you had a major life event recently, give your estate attorney a call and ask them to review and help you update your plan if needed.