One of the most important things a person can do after a divorce is to update his or her beneficiary designations, and indicate who should get the money in various accounts if the person should unexpectedly pass away.
A new ruling from the U.S. Supreme Court shows just how dangerous it can be to forget this step.
Most married people name their spouse as the beneficiary of their accounts, but in the stress following a divorce, they often forget to update these designations.
And even when people make an effort, they might not remember every account. Pensions, 401(k) plans, life insurance policies, brokerage accounts, bank accounts, and more may all have listed beneficiaries.
Remember that if you die, who gets the money in these accounts usually depends on who is the listed beneficiary – not who is named in your will. Even if your will says that “everything” will go to a new spouse or a child or other relative, the will doesn’t govern a separate account such as a 401(k) or an insurance policy.
Some states have tried to help divorced people by passing laws that say that a divorce automatically revokes these types of beneficiary designations. But even where that’s true, you still need to name a new beneficiary, or the money might still go to someone who is not your choice.
Also, these laws don’t always work, as the Supreme Court decision shows.
The case involved Warren Hillman, a federal employee in Virginia who had low-cost group life insurance through a special program for federal workers. Warren married Judy in 1996 and named her as his life insurance beneficiary, but divorced her two years later. In 2002, he married Jacqueline, but for whatever reason he never changed the beneficiary on his life insurance.
In 2008, Warren died. Both his wives claimed his $125,000 life insurance proceeds.
The Supreme Court noted that, under Virginia law, a divorce revokes beneficiary designations such as on a life insurance policy. However, because the life insurance in this case was arranged under a federal program – and federal law trumps state law – the Virginia law didn’t apply. Therefore, all the money went to first-wife Judy, not second-wife Jacqueline.
So it’s very important for people who have been through a divorce to make sure that all their beneficiary designations are updated.
And this is true even if you actually want your ex-spouse to remain as your beneficiary (as sometimes happens in an amicable divorce where children are involved). If a state law says that beneficiary designations are revoked by a divorce, you’ll need to take extra steps to make sure your ex stays on as the beneficiary.