Beneficiaries – Blog Archive

Changing Your Beneficiaries After Divorce

jeory on February 10, 2015

Category: Divorce, Uncategorized
Tag: Beneficiaries, NJ Divorce

The great majority of divorcing couples in New Jersey resolve their issues in the form of a Marital Settlement Agreement (a.k.a. Property Settlement Agreement). In addition to a division of marital assets, such Agreements may include a waiver of certain assets, such as life insurance or retirement benefits. Although New Jersey, as well as many other states, has enacted legislation voiding the rights of a former spouse named in a will, potential problems exist with regard to non-probate assets which contain death beneficiary provisions such as life insurance, 401 (k) plans and Individual Retirement Accounts.

For example, in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 U.S. 285 (2009), the United States Supreme Court held that as a matter of federal law (commonly known as ERISA which governs qualified retirement plans), the plan benefits had to be paid to the designated beneficiary, in this case the former wife. regardless of whether she had waived her rights to same in the parties’ Marital Settlement Agreement [the ruling did not, however, preclude the possibility of the estate or beneficiaries of the estate suing the decedent’s former spouse as the Court remained silent on the issue]; see also Estate of Kensinger v. URL Pharma, 674, F.3d 131 (3d Cir. 2012), which addressed the issue left silent in Kennedy by ruling that once the proceeds were paid to the former spouse the estate could bring suit to recover the benefits.

In the case of life insurance, the Kennedy decision would not be binding, however, since New Jersey law specifically provides that a former spouse is divested of beneficiary status following a divorce.

With respect to traditional and Roth IRA’s, the outcome remains uncertain. Although IRAs are retirement accounts, they are not governed by ERISA. Should the IRA custodian, like a 401(k) plan administrator, be able to rely on a beneficiary designation naming a former spouse and pay pursuant thereto regardless of whether the former spouse waived the right to payment in a Marital Settlement Agreement? Can a contingent beneficiary demand payment from the IRA custodian based upon such a waiver? Can the contingent beneficiary recover the proceeds paid to a former spouse by the IRA custodian? Suffice it to say that no definitive answers exist since no court has yet ruled on such matters.

One potential solution is to change all beneficiary designations naming a former spouse upon divorce. In this regard, persons are advised to consult with knowledgeable counsel before determining how to proceed.

Review Your Beneficiary Designations

rdurkin on February 3, 2015

Category: Trusts & Estates, Uncategorized
Tag: Beneficiaries

I was recently contacted by a fraternal organization regarding an estate that I represented. The decedent, who was in his 80’s when he died, had an insurance policy through the organization that had been issued when he was 16! His parents were the named beneficiaries. The estate is able to collect the insurance proceeds since the beneficiaries had predeceased the decedent. But how much easier would everything have been, and possibly more aligned with the decedent’s wishes, if the named beneficiaries had been current?

Certain assets, such as insurance and retirement accounts, pass by beneficiary designation and not under the terms of a Will or under the intestacy laws (unless the beneficiary has predeceased). When is the last time you checked your beneficiary designations on:

Your employer-provided life insurance?
Your employer-sponsored 401(k)?
Any individual retirement accounts (IRAs)?
Policies that you have purchased directly from an insurance company?

Your circumstances may have changed since you filled out that original beneficiary designation. Maybe you have married. Maybe you have divorced. Maybe you had named your parents or siblings or cousins, and they are either deceased or you are estranged from them.

Retirement accounts and IRAs are especially problematic if you do not have current beneficiaries. In general, if an individual is the beneficiary of a 401(k) or IRA, the individual may stretch out the payments over his or her life expectancy. Since the income tax was deferred when funds were deposited to the retirement account, the individual receiving the payments must pay the income tax – but if the payments are stretched out, the tax hit is lessened. If a 401(k) or IRA is paid to an estate, however, no stretch-out is available – an estate does not have a “life expectancy.” The estate will pay all of the income tax in one year, which could possibly be a very substantial tax hit.

Take a few minutes to check your records. Each insurance company or financial institution will have forms to change your beneficiaries if need be, many available online. For only a few minutes of your time, you will be able to save your family members much aggravation and possibly a great deal of money.

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