How to Prevent Issues with Keeping the Ex-Spouse as a Beneficiary

It’s pretty common advice that we give to our clients that after they’re divorced, they need to be sure to update their beneficiaries on retirement accounts, pensions, life insurance, etc. But what if they need to keep the ex as a beneficiary as part of the settlement? Is it ok to just leave them in place? NO!!!!

We’ve all heard the stories of someone dying post-divorce and lo and behold they forgot to change the 401k beneficiary and the ex-wife got the funds even though everyone involved knew it wasn’t the deceased’s intention. Well, since that happened a few times, states began passing protective laws.

Most states, but not all, have passed laws that now say that upon a legal divorce, any beneficiary designation that lists an ex-spouse becomes null and void – UNLESS it is reconfirmed post decree.

So what does this mean? Let’s say we’ve helped a couple structure a mediated settlement and husband will pay wife alimony of $50,000 for five years, a total obligation of $250,000 over the length of time. Normally, we would advise these clients to have a life insurance policy to secure this stream of income but what if husband is uninsurable? Often my recommended solution is to agree to leave the wife as a partial beneficiary on his $500,000 401(k) until the obligation is satisfied.

That works really well but if husband doesn’t send in a new beneficiary designation after the divorce is final, has remarried, and then passes away, a probate court may have no choice but to deny the ex-wife’s claim and pay the new spouse.

 So, remember to make it very clear to your clients that if the ex is to remain beneficiary on ANYTHING, cover your bases and have them RESTATE the ex when the divorce is finalized.

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