Divorce proceedings are nasty and many issues arise including custody, support, alimony, and property division. One of the most overlooked (and often ignored) aspects of a divorce is beneficiary designations on retirement plans, annuities, and life insurance. Since these assets often comprise the bulk of a person’s assets, it is important to understand the ramifications that divorce has and the consequences of neglecting your plans.
The starting point is to determine which law applies to the particular asset. Some assets are governed by federal law while others are governed by state law. If you have a retirement plan through work, life insurance provided by your employer, or certain insurance benefits, your plan is governed by The Employee Retirement Income Security Act (ERISA). Assets such as bank accounts, IRAs, life insurance obtained privately (i.e., not through your employer), annuities and stock accounts are governed by state law.
What is ERISA?
The Employee Retirement Income Security Act governs employee benefits and requires married couples to designate their spouse as the primary beneficiary on all benefits unless the spouse provides a signed, notarized waiver. In other words, you cannot unilaterally opt out of ERISAs provisions without the affirmative consent of your spouse.
ERISA controls what happens after a divorce in the context of retirement plans and life insurance provided by your employer. ERISA rules state that the beneficiary designation remains “as-is” after a final divorce decree is entered. This is true even when a court awards your ex-spouse part of your pension or 401k under the terms of a Qualified Domestic Relations Order (QDRO). If you keep your ex-spouse listed as your beneficiary, he or she will receive any benefits payable under the plan at your death.
Since ERISA is a federal law, it trumps any contrary state law under the legal theory of pre-emption. In other words, since there is a federal law governing employer-sponsored benefits state law is of no consequence.
If you are going through a divorce, it is imperative that you update your beneficiary designations. You cannot make any changes during the pendency of the divorce without your spouse’s approval. In practice, updating your beneficiary designations should be one of the first things that you do after the entry of the final decree in your divorce case.
When Does State Law Apply?
As previously mentioned, bank accounts, IRAs, life insurance obtained outside of work, annuities, and stock accounts are governed by your state’s laws. Under Texas law, beneficiary designations on these types of assets are automatically voided. The law treats your ex-spouse as though the beneficiary designation is valid but as if he or she predeceased you. Your ex-spouse will not receive any assets as a beneficiary under Texas law because Texas law requires a beneficiary to survive you in order to collect under a valid beneficiary designation.
Any benefits due under these types of plans will go to the next named beneficiary. In my experience, most people do not list a contingent beneficiary. They only name their spouse as primary beneficiary. In these cases, any benefits due will be paid to your estate and distributed pursuant to the terms of your will or trust. Having these benefits payable to your estate means that they are now assets to which your creditors can attach. Note that under Texas law, an ex-spouse is deemed to have predeceased you for purposes of your will/trust as well. Said another way, your ex-spouse will not get the benefits of any plans governed under Texas law.
While he or she may not get anything, you can prevent a lot of fighting, headaches, and save yourself a lot of money by simply updating your beneficiary designations when your divorce is finalized. Plans governed by Texas law would theoretically allow you to change beneficiary designations during the divorce proceeding. However, in reality temporary orders can and often do prevent you from making any changes to existing plans of insurance or retirement benefits.
It is imperative that after your divorce is finalized, you consult with a financial advisor, tax advisor and a qualified estate planning attorney to update your paperwork. The last thing you want to do is cause your heirs (children) needless pain and suffering for something that could be easily avoided. If you own assets in another state, it is imperative that you get with a qualified estate planning attorney as quickly as possible. Not all states treat ex-spouses like Texas does. It may be possible that your ex-spouse can be the beneficiary of a retirement plan, life insurance policy, or other insurance plan.
Call Green Law, PLLC today at (806) 548-2953 to review your beneficiary designations and make sure your plan matches your wishes. REMEMBER THIS RULE: IF THE ASSET IS AN EMPLOYER PROVIDED BENEFIT, YOUR DIVORCE HAS NO IMPACT ON YOUR BENEFICIARY DESIGNATION; IF THE ASSET IS GOVERNED BY TEXAS LAW, YOUR DIVORCE DOES HAVE AN IMPACT YOUR BENEFICIARY DESIGNATION.