For Your Own Good Understanding Michigan Estate Planning

Sep 01 2009Recently Divorced? Don’t Forget Your Beneficiary Designations

If you update your Will, Trust, or other estate planning documents, don’t forget about your beneficiary designations for life insurance and retirement plan benefits.  Life insurance and retirement benefits will be paid directly to the beneficiaries you name through the insurance company or retirement plan administrator.  These are contractual arrangements separate and apart from your Will or Trust provisions.  While your Will may sound like it covers everything you own, the Will only governs assets that are subject to probate proceedings.  A Trust Agreement covers the distribution of only those assets that are in the Trust or payable to the Trust.

Updating your beneficiary designations periodically is an important part of a good overall estate plan.  In fact, a critical time to update your beneficiary designations is following a divorce.  While a Divorce Judgment may terminate your ex-spouse’s interest in the insurance policy, unless you update the beneficiary designation, the insurance company may end up paying the life insurance proceeds to your estate (which means probate proceedings), even if you have named your children as the secondary beneficiaries.  The beneficiary designation typically indicates that if the primary beneficiary predeceases you, then the benefits are paid to the secondary beneficiary (your children for example).  However, in the case of a divorce, the primary beneficiary (your ex-spouse) has not predeceased you.  Rather, he or she no longer qualifies as a beneficiary.  As a result, the insurance company is free to pay the insurance proceeds to your probate estate rather than to your children directly.  If you update your beneficiary designations after a divorce, then you can avoid this problem.

The problem is even worse if you fail to update the beneficiary of a 401(k) retirement plan.  Under federal law, if you name your spouse as the primary beneficiary and then you are divorced, unless you update your beneficiary designations for your 401(k), the plan administrator will pay those proceeds to your ex-spouse.  Unlike life insurance, a 401(k) plan is subject to federal law which takes precedence over state law.  Therefore, even though your spouse may have already received half of your retirement plan through the divorce, he or she may, through your lack of attention to detail, receive the other half upon your death.  Again, this can be avoided by updating your beneficiary designations promptly following a divorce.