Why is it so important to review beneficiary designations after divorce?

While it may seem a hassle, reviewing beneficiary designations on all accounts is important after a life-changing event such as a divorce.

Once you have the final divorce decree in hand, you may assume you are finished. However, if something happens to you, do you want your life insurance policy or 401(k) plan to go to an ex-spouse? There is one more item to check off your divorce checklist.

Beneficiary designations transfer an increasing array of financial accounts on death. Some accounts that use these designations are life insurance, 401(k) plans, federal government pensions and bank checking/savings accounts. When you set up these accounts, you complete a form listing a beneficiary if anything happens to you. When starting a job it is probably somewhere in the initial stack of paperwork.

What about changes made to a will?

It is often not enough to make changes to your will following divorce. When it comes to beneficiary designations, they often trump the desires laid out in a will. A recent Missouri Court of Appeals case details what can happen. In 1996, the husband designated his wife as a beneficiary of a Fidelity IRA account. The couple divorced in 2000 and husband received the IRA in the property settlement.

Several times over the years, the ex-husband contacted Fidelity for information on how to access the Beneficiary Change Form. On one occasion, Fidelity sent the form to him. On a later call, a representative sent a link to the on-line change form. He never filled out or returned the form. When he died, a fight between his estate and ex-wife ensued.

The estate cited a Missouri statue that revokes an ex-spouse as the beneficiary on the date the marriage ended. Several states have such statutes, but they have not held up to judicial scrutiny. In the Missouri case, the appellate court referenced a U.S. Supreme Court case that held ERISA governed and overrides or pre-empts state statute to reduce administrative burdens in identifying the correct beneficiary.

The circuit court had not addressed the Supreme Court case and instead awarded the funds to the estate based on the intent of the ex-husband. The Court of Appeals reversed and remanded the case to the circuit court with the specific instruction to enter a judgment in favor of the ex-wife including costs and attorney's fees.

This case is just one of many where failure to change a beneficiary designation results in an unintended transfer of assets. The circuit court seemed to do what it thought was just by awarding the IRA to the estate, but the law did not support the decision. In the Supreme Court case, the couple had only been divorced for two months and it was likely that the ex-husband did not have an opportunity to change designations before dying in an auto accident. That did not matter. Before you finalize your divorce, speak with an attorney about retirement and life insurance-related issues.

Keywords: divorce, retirement accounts, life insurance, beneficiary designation review