Beneficiary Updates to Avoid Ex-spouse Inheriting Assets
Most state laws, including California, put in effect ATROS (Automatic Temporary Restraining Orders) which accompanies the Summons and disallows any changes in beneficiaries (and other changes) during the pendency of divorce. While changes may not be made during the divorce proceeding, they should be made immediately thereafter where possible.
Twenty-three states, including California, have laws that may revoke a former spouse as beneficiary for assets that are distributed by will or trust. And, sometimes this applies to some non-probate assets as well. However, in CA this excludes life insurance and certain retirement accounts.
The key beneficiary designations that are NOT automatically revoked by a a divorce decree are: life insurance plans (individual policies and company policies) and retirement plans such as 401(a) and 403(b) plans which are typically governed by federal law (ERISA). Instead, he beneficiary designations on these assets supersede state laws. Inheritance may be awarded to an ex-spouse if the name is not updated and removed.
Sometimes, for the purpose of protecting the support obligation, ex-spouses agree or are ordered to keep their spouse on their life insurance plans (and sometimes retirement plans) to cover the support obligation once they have passed. This extends the timing of the change in the beneficiary on these assets, to a future date. Ostensibly, this also increases the possibility of forgetting to update the beneficiaries once the support obligation has terminated.
Divorce does not automatically update all beneficiaries and neither does remarrying authorize a new spouse as a beneficiary.
If beneficiaries are not updated when the divorce is finalized, there can be consequences down the road when a spouse passes. This is especially critical when there are adult children involved who may be left out of the inheritance due to intestate laws and when there is a blended family or remarriage and the current spouse and non-spouse beneficiaries are not considered.
Upon finalization of divorce, it is imperative to update a will and named power of attorney over your finances and health. These can actually be updated during the pendency of the divorce in California and are not covered by ATROS.
When a final decree is received, 401(k), 403(b), 457, deferred compensation plans and pension plans should be updated with new beneficiary designations wherever possible if not required to be maintained as status quo for a support obligation.
Group life insurance, individual life insurance (including term, universal and whole life policies), group critical illness insurance, short and long-term disability insurance and health savings account beneficiaries should also be updated.
Many Transfer on Death designations would likely be covered by the statutes revoking an ex-spouse beneficiary. However, it is prudent to be sure that these accounts, which may include: checking, savings, CDs, money markets, brokerage accounts, IRAs, and annuity accounts are also revisited to verify the proper beneficiary designations.
Finally, it is wise to update car and home insurance information, trusted contacts on brokerage accounts and emergency contacts on your phone and medical records. Strongly encouraged is the designation of a healthcare power of attorney.
Not updating your beneficiaries after divorce can be a costly mistake and cause years and time in probate court for would-be heirs.
This article does NOT constitute legal advice and is for general information purposes ONLY. Prior to making any decisions, seek legal counsel from a licensed attorney.
