Beneficiary Designations and Divorce

One potential consideration of divorcing spouses is changing beneficiary designations on insurance policies, IRAs, 401(k)s, etc.   Usually, this is simply a clerical change that can be done by revising a beneficiary designation form.  

 Notwithstanding the ease of completing such forms, historically many divorced individuals failed to complete the task.   Recognizing that divorced spouses generally do not want to benefit their former spouse, the Pennsylvania legislature stepped in to remedy this problem in 1992.   In that year, legislation was passed that invalidated a beneficiary designation in favor of a divorced spouse on any “insurance policy, annuity contract, pension or profit sharing plan or other contractual arrangement.”  Under that law, the ex-spouse of the decedent is treated as “pre-deceasing” the decedent, and that ex-spouse is therefore skipped over in favor of a “contingent beneficiary” or the estate of the Decedent.  This law protected the careless or forgetful spouse who failed to take that one last step after his or her exhausting divorce.

The Pennsylvania law seemed helpful enough and presumably followed most divorced couples’ intentions.   Many divorcing parties and many divorce lawyers have taken comfort from this statute and may even have skipped the step of changing beneficiary designations in reliance upon it.  

However, such reliance is not as safe as a simple reading of the law would have one believe.   The wrinkle is that any plan or insurance policy that is connected to employment and subject to ERISA will not have its beneficiary designation automatically changed upon divorce.  If you are divorced and have a 401(k) plan, a pension, or even an insurance policy issued through your employer, it would be wise to ensure that the beneficiary designations are changed in writing because the Pennsylvania law will not operate to remove the divorced spouse as the beneficiary.  

 Generally, this has been the rule since 2001 when the United States Supreme Court held that ERISA “preempts” state property laws with respect to ERISA plan beneficiary designations.  However, people continue make the mistake of not changing beneficiary designations and then pointing to the Pennsylvania statute to provide a different outcome.   As recently as November 2011, in the case of In re: Estate of Sauers, the Pennsylvania Supreme Court issued a ruling that reiterates that divorcing couples do not get the benefit of the Pennsylvania law with respect to ERISA plan death benefits. 

Sauers demonstrates the exact outcome the Pennsylvania law sought to avoid.  Following the Sauer’s 2002 divorce, Mr. Sauers failed to replace his ex-wife as the beneficiary on a $40,000 employee group life insurance plan.  Mr. Sauers died in 2006.  The insurance proceeds were paid to his ex-wife.  The estate administrator on behalf of the contingent beneficiary (Mr. Sauer’s nephew) protested based on the Pennsylvania statute.  The case wound its way to the Pennsylvania Supreme Court.  The Pennsylvania law, which would have directed payment to the nephew, was found by the Court to be preempted by ERISA.   Thus, despite what was probably the wish of the decedent husband, that $40,000 went to his ex-wife.

If you are divorced, there is no substitute for checking all of your beneficiary designations.   Do not rely on the law to appoint the proper person as the beneficiary of your plans or policies.
Rod Fluck



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