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Divorce May Require Changes to Beneficiary Designations

Maria opened the envelope from the insurance company, peeked inside, and squealed. “Carlos, come quick. Someone sent me a check for $50,000!” Carlos walked into the room, chuckling. “Better read the letter that came with it. You’ll probably have to provide a credit card number and pay a couple of hundred bucks to claim it.” He smirked. “It’s probably a scam.”

Excitedly, Maria opened the accompanying letter. After she read it, she frowned. “This can’t be right…” “What’s it say?” Carlos asked. “It says George, my first husband, named me as a beneficiary on one of his life insurance policies. That makes no sense. We’ve been divorced for 25 years. He has a new family. This has got to be a mistake.” “Boy, I’ll say. Better not cash it before you talk to a lawyer. You don’t want to get stuck paying it back if his wife or kids sues you.”

Maria sighed and stuffed the check back into the envelope.

In some states, financial contracts that designate former spouses as beneficiaries for “non-probate assets”—assets not distributed by will or under the jurisdiction of the probate court– are automatically revoked upon divorce. If the holder of the policy or account doesn’t act to change the beneficiary designation, the proceeds automatically go to the decedent’s estate. In other states, however, former spouses may remain beneficiaries of non-probate assets if the designation is not changed.

Generally, non-probate assets can include checking and savings accounts, qualified and non-qualified retirement plans, individual retirement accounts, private or group life insurance policies, annuities, mutual fund accounts, and certificates of deposit. Their disposition upon the death of the account holder is typically governed by state law, or by a combination of state and federal law. Currently, about 23 states, including California, have statutes requiring revocation of non-probate asset beneficiary designation upon divorce, meaning that upon divorce, ex-spouses are automatically removed as beneficiaries on such assets as a matter of law. However, in California, the law specifically excludes life insurance policies from automatic revocation

In California, designating a former spouse as the beneficiary to a life insurance policy prior to or during marriage will stand, unless:

  • The property settlement or divorce decree specifically provides for a contrary result,
  • The policy holder changes the beneficiary designation,
  • An insurance contract nulls the beneficiary designation upon divorce, or,
  • The former spouse legally waives their interest in the policy.

It doesn’t matter who owns the policy and who receives it in the divorce. The beneficiary designation remains intact unless changed in accordance with the law or the insurance contract.

Similarly, if an insurance policy is provided as an employee benefit under what is known as a “qualified benefit plan” and governed by federal law, the policy holder is required to physically change the beneficiary designation upon divorce, or the proceeds will go to the former spouse if they are named as the beneficiary.

It is important to note that intent has no bearing on beneficiary designations for life insurance policies. The courts will not seek evidence of contrary intent, such as a verbal promise by the policy holder. They will assume that if the policyholder wanted the beneficiary designation changed, they would have done so. Challengers to beneficiary designations have a very high standard of proof that is difficult to achieve.

In all cases, federal law preempts state law, meaning even if a state provides for automatic revocation, if federal law does not, that is the standard that will be applied in appropriate cases. In addition, if someone wrongfully receives the benefits paid from non-probate assets, they will be required to reimburse the entity that issued the payment or the legally-entitled beneficiaries.

Therefore, upon a divorce, it is important to consult with an estate planning attorney to discuss appropriate action regarding non-probate assets. In some cases, parties to a divorce may receive a closing letter from their attorney that outlines changes required under the property settlement and divorce decree That can serve as a guide to the changes required. Other changes may be dictated as a matter of state or federal law, or required by contract.

All beneficiary changes and waivers should be documented in writing, and copies filed with your estate plan.

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