So, after a long, drawn out, expensive legal battle, your divorce is finally all done. Congratulations. Thank goodness that financial debacle is behind you...or is it? Before you start the celebration, you might want to make sure to update and change any beneficiary designations on life insurance and retirement accounts that previously named your ex-spouse.
Failing to do so may have you turning over in your grave if upon your untimely death your ex-spouse is still named as a beneficiary and is able to cash in on your life insurance and retirement account you left behind. Unfortunately, this situation is happening quite frequently leading to litigation across the country between families of the deceased and ex-spouses. The answer to who will win, is not always that clear.
Probate v. Non-Probate Assets
Many people do not realize that life insurance and retirement accounts are handled very differently than other assets such as real estate and regular investment accounts when it comes to probate and estate matters. When there is a beneficiary designated on life insurance or a retirement account, these assets do not pass through the estate of the person that passed away. Instead, they go directly to the named beneficiary and are considered “non-probate” assets.
This means that even if you have a Last Will and Testament that says your brother Bob is to inherit your IRA, Bob may not get see a penny of it unless you specifically name him as the beneficiary on the beneficiary designation forms on file with the financial institution that handles your IRA.
What Are The Rules For Divorce with Probate or Non-Probate Assets?
Unfortunately, the law in this area is complicated. If litigation arises between the ex-spouse and the family over entitlement to the funds, who will win will depend on many things including:
- The contractual language of the plan and policy
- Applicable Federal Law
- Applicable State Law
- The language, if any, in the divorce decree/judgment
This problem has become so prevalent that many states are now passing laws that automatically revoke the designation of a former spouse or domestic partner as beneficiaries if the insured failed to designate a new beneficiary after divorce. There are exceptions to when this is applied however.
Families Must Be Proactive
Unless someone tells the insurance company that the insured was divorced, it is very likely the insurance company will simply pay the former spouse as the named beneficiary. Once this happens, the task of getting the money back from the former spouse will be very difficult and likely very expensive legally.
In order to prevent this problem, the insured’s family should immediately give written notice to the company handling the insurance policy or retirement account that they are contesting the ex-spouse's entitlement to the benefits payable. Once the company is aware of the dispute, it is likely they will pay the money over to the court and let the court decide who is entitled to the funds.