Re-examining your beneficiaries is an important aspect of divorce.
There are two types of beneficiaries: The primary beneficiary is the first person to receive an asset and the contingent beneficiary is the person who receives an asset if the primary beneficiary cannot receive the asset. Beneficiary designations override provisions in a will.
When you are married, usually your spouse is named the primary beneficiary. Obviously, divorce almost always changes that desire. However, many people forget to change their beneficiaries or put it off. That can have unintended consequences.
Individuals with children will usually want to change their beneficiaries to their children. That cannot be done via a beneficiary designation if children are minors. Minors cannot legally manage or control inherited property. If a child directly inherits assets, those assets go to probate to delegate an adult to manage the money. That ties up the asset and costs money. Parents of minor children will want to set up a trust and name a trustee to manage those assets, until at least the time the child turns 18.
Many divorce settlement agreements will contain language saying that each spouse is relinquishing any right to a share in the estate of the other party upon said party’s death and that their wills are null and void. However, if there is a beneficiary designation on file with a financial institution, and that beneficiary names the ex-spouse, that designation may still be valid.
Some states have a law where a former spouse is automatically removed as a beneficiary or appointee from documents like wills, trusts, life insurance and powers of attorney when the divorce is finalized. Revocation upon divorce statutes are meant to protect possible oversights after dealing with the emotional trauma of divorce. If you live in one of the 24 states (including North Carolina) that do not automatically revoke an ex-spouse as a beneficiary upon divorce, your assets and property may be inherited by your ex.
Some states impose automatic temporary restraining orders (“ATROs”) so that assets cannot be transferred and insurance cannot be changed, among other things, during the divorce process. This also means that beneficiaries cannot be changed. However, if your state does not have ATROs, your beneficiaries can be changed during the divorce process. Exceptions to this rule are plans governed by ERISA, which include private employer 401(k) plans, pension plans and ESOPs. Plan participants must wait until the divorce is final.
A best practice is to review all beneficiaries and contingent beneficiaries after any life event: marriage, divorce, the birth of children or grandchildren, retirement, or death of a loved one. Doing so ensures your intent is carried out after death.
