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When they’re happily married, couples don’t usually spend much time debating who’s going to be the beneficiary of assets like pension plans and other retirement accounts. During a marriage, spousal rights typically take precedence, and it’s understood (and generally accepted) that if one spouse dies, the other will be entitled to the funds.
Naturally, once a couple decides to divorce, all that changes.
Women who are divorcing need to re-think the beneficiary designations on wills and all retirement accounts. Then, each one of these documents must be appropriately updated. If you don’t, your ex-husband very well could still be eligible for a portion of the funds!
You can make some of these beneficiary changes while you are contemplating divorce. Others will have to wait until after your divorce settlement agreement is final. (For example, ERISA-regulated retirement accounts (discussed below) cannot be changed without the consent of your spouse.)
So, immediately after you divorce –and possibly before you re-marry, as well –please remember to review your beneficiary designations, as laws in this particular area of personal finance are becoming stricter than ever before.
Here’s a case in point:
At FinancialPlanning.com, Ed Slott recently described an example where a deceased man’s workplace retirement savings were passed onto his new wife, even though he had previously named his three kids as beneficiaries.
How could this possibly happen?
At first blush, it appears that the father had played by the rules. Originally, he had named his wife as the sole beneficiary of his 401(k) plan. But, after she passed away, he updated his beneficiaries, naming his three children.
So far, so good.
The problem arose when the father re-married. At that point, he neglected to obtain what’s called a “spousal waiver” for his 401(k). The spousal waiver is required if you want to name someone other than your spouse as the beneficiary of an ERISA-regulated retirement plan such as a 401(k). (ERISA is short for The Employee Retirement Income Security Act of 1974, a federal law that establishes minimum standards for pension plans in private industry and governs transactions associated with them.)
When the father died, the children thought they would inherit his retirement funds. Unfortunately, the new wife thought she was entitled to them, too.
The case went to court, and a few months ago, a U.S. District Court in Louisiana ruled that under the terms of the plan, the new wife’s right to the retirement account vested immediately upon marriage.
So, since no spousal waiver had been filed, the new wife was entitled to all the 401(k) funds –even though she was not named as the beneficiary . . . and even though she had only been married to the father for six weeks!
This case illustrates that, in some instances, a beneficiary form alone may not be sufficient.
In addition, as Slott rightly concludes, this case also makes it clear that you should consider moving ERISA plan money to an IRA before a second marriage when someone other than the soon-to-be spouse is the desired beneficiary.
After all, when you own an IRA, you can name whomever you choose as the beneficiary. Unlike ERISA plans, spousal rights don’t usually apply to IRAs (except in a certain instances for couples living in community property states).
As you can see, a signed divorce agreement opens up many new financial planning options for you to consider. One of your first steps should be to carefully change the beneficiary designations on your will and all retirement accounts. In addition, you may also want to consider rolling over ERISA plan money to an IRA. Then, you can rest assured that your assets will be inherited precisely according to your wishes.
Interestingly enough, it’s not unusual for all this 401(k) and retirement account talk to permeate prenup agreements, as well.
For example, in some cases, a woman may ask her fiancé to sign the prenup waiving his rights after marriage to her 401K plan and other ERISA retirement accounts. Remember, though, he cannot sign the spousal waiver form until after the marriage vows are exchanged. If the spousal waiver form goes unsigned after the marriage, the wife could find herself in a situation similar to Ed Slott’s example: Even though she has a valid prenup, he did not sign the spousal waiver after he became her husband.
What could happen if he simply refuses to sign? Well, then things could get very sticky. If there was language in the prenup requiring him to sign the spousal waiver after marriage and he does not, she might have to sue her new husband! Alternatively, the prenup could include some penalty language stating that if he did not sign the spousal waiver after marriage that he will get nothing or some reduced amount.
Jeffrey A. Landers, CDFA™ is a Divorce Financial Strategist™ and the founder of Bedrock Divorce Advisors, LLC (http://www.BedrockDivorce.com), a divorce financial strategy firm that exclusively works with women, who are going through, or might be going through, a financially complicated divorce. He also advises women business owners on what steps they can take now to “divorce-proof” their business in the event of a future divorce. He can be reached at Landers@BedrockDivorce.com.