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Imagine getting a note like this:
“Dad divorced his second wife 12 years ago. His will leaves everything to my sister and me. Now the 401(k) company says the money goes to her, because she’s still listed as his beneficiary. How is that possible?”
Let’s say that’s Paul. He’s not a real person, but his problem is a real one, and what happened to his family can be perfectly legal.
I’ve been a CPA since 1981, and I served as executor of my parents’ estate. Here’s the hard truth: for many accounts, the will isn’t in charge. The beneficiary form is.
“Remember that beneficiary designations typically override instructions in your will,” the Financial Industry Regulatory Authority warns (1).
For workplace retirement plans, federal law makes it even tougher. The U.S. Supreme Court ruled in 2001 that a state law revoking an ex-spouse’s beneficiary status on divorce was pre-empted by federal law for employer plans covered by ERISA (2).
What’s ERISA? The letters stand for the Employee Retirement Income Security Act of 1974. It’s the federal law that sets minimum standards for most retirement and health plans offered by private-sector employers (5).
That covers traditional pensions, as well as 401(k)s, a popular type of plan in which what you end up with depends on what goes in and how it grows (6). It doesn’t cover plans run by federal, state or local governments, or some church plans (6). If Dad worked for a city, a state or a public school, different rules may apply.
And in a 2009 case, the court said a plan administrator was right to pay an ex-wife, even though her divorce decree had divested her of her interest in those benefits, because the plan documents still named her as beneficiary (3).
IRAs and life insurance you buy on your own can be different, depending on your state (4). Here’s what Paul’s family needs to know, and how to make sure your kids never write a note like his.
1. The form usually wins, so check yours today
Retirement accounts and life insurance pass by beneficiary designation, not by your will. That’s why FINRA tells investors to review those designations regularly, especially after major life events such as marriage, divorce or having children (1).
The fix is simple, and it usually costs nothing. Log in to every retirement account, annuity and life insurance policy you own and look at who’s named. Then name a backup, or contingent, beneficiary on each one.
A single forgotten form can send your biggest asset to the wrong person.
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2. With a 401(k), the plan documents rule
Many states have laws that automatically cancel an ex-spouse’s beneficiary status after a divorce. But in Egelhoff v. Egelhoff, the Supreme Court held that Washington state’s version was “expressly pre-empted” for plans governed by federal ERISA law (2).
Then came Kennedy v. Plan Administrator for DuPont. A divorce decree had divested the ex-wife of her interest in the plan’s benefits, but her ex-husband never removed her as his beneficiary. The court said the plan administrator “did its ERISA duty” by paying her (3).
For Paul, that’s bad news. If his dad’s 401(k) was an ERISA plan, which is likely, the plan will likely pay whoever is on the form.
3. IRAs and individual life insurance may follow state law
Outside ERISA plans, state law matters more. (Group life insurance through work can fall under ERISA, too, as it did in the Egelhoff case.) In Sveen v. Melin, a 2018 case about a life insurance policy, the Supreme Court noted that “26 States have by now adopted revocation-on-divorce laws” (4).
Under Minnesota’s law in that case, a divorce generally revokes a revocable beneficiary designation made to a former spouse (4). The court upheld applying it even to a policy bought before the law passed (4).
But that’s only about half the states. In his dissent, Justice Neil Gorsuch noted that “nearly half the states today do not treat divorce as automatically revoking insurance beneficiary designations” (4). Where you live, and where Dad lived, can decide who gets the money.
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4. Don’t leave this mess for your own kids
Paul’s dad probably never meant to leave his ex-wife a dime. He just never updated a form. That’s the whole lesson.
Put your wishes in writing, keep them current and make sure your beneficiary forms match. It’s one of the cheapest favors you’ll ever do for your family.
When you’re gone, your problems vanish — but your family’s nightmare is just beginning. Without a plan, courts decide everything, probate drags on for months, and loved ones are left guessing. Shield them with a will, a trust or both — today.
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5. What Paul’s family can do now
First, get everything in writing. Ask the plan administrator for a copy of the beneficiary designation on file and the plan’s rules for paying a death benefit.
Second, talk to a probate or estate attorney quickly, before the money is paid out. This is legal territory, and the answer depends on the type of account, the plan’s documents, the divorce decree and state law.
Third, don’t assume the will settles it. In Paul’s case, the will controls what goes through probate. The 401(k) most likely doesn’t go through probate at all.
My honest take
A family can do everything right on the will and still lose the biggest asset, all because of a form someone filled out decades earlier and forgot about.
That’s what makes this mistake so cruel. Nobody notices it while you’re alive. Your heirs find out only when it’s too late to fix.
Divorced? Remarried? Lost a spouse? Pull up every beneficiary form you have this week, and make sure each one says what you’d say today. It takes an afternoon, and it may be the most valuable afternoon your heirs never hear about.
Sources: 1. FINRA; 2. Egelhoff v. Egelhoff (Cornell Law School); 3. Kennedy v. Plan Administrator for DuPont (Cornell Law School); 4. Sveen v. Melin (Cornell Law School); 5. U.S. Department of Labor; 6. U.S. Department of Labor, FAQs About Retirement Plans and ERISA
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