DennisBeaverJune 7, 2014   •  By Dennis Beaver

If you or someone in your family has some type of a retirement plan-IRA, pension or life insurance — today’s story has critically important information that many people are completely unaware of and which can result in a financial nightmare.

Our story begins with a phone call from a Selma reader, “Sean” who made a horrible discovery within weeks of his father’s death.

“Mom and dad were married almost 25 years — this was their second marriage — and dad had a retirement account through his employer, opened when he was married to his first wife. That marriage only lasted one year and they did the divorce themselves, with no lawyer. He worked for the same employer for over 30 years.

“Helping my mom, I contacted the company which handled dad’s retirement, sent them his death certificate and will which says that mom is to get everything, then received a letter which I have not yet shown her.

It says that she is not entitled to any part of his retirement because dad named his first wife as the beneficiary.  They sent me a copy of the form, and her name is there.

“Please tell me this can’t be so!” my anguished reader pleaded. “I thought that when you get divorced and re-married that all those kinds of things, like a will, retirement benefits or 401(k) accounts are automatically revoked, and the former spouse will not get the money. Is that correct?”

Retirement benefits are not ordinary assets

“Dennis, what you are describing happens far more often than most people realize. Anyone who has assets in a retirement account — 401(k) , 403b or a life insurance policy — needs to understand that these are not ordinary assets,” Professor Stewart Sterk from the Cardozo School of Law, tells You and the Law.

“People mistakenly believe they can change who gets these assets with a will, and in general, they can’t. With your home, or a bank account, it’s easy to direct who gets what, but with retirement accounts and life insurance, it’s the beneficiary designation form which controls.

“These forms are often signed decades ago and never changed. So, John Smith has a retirement plan-perhaps a 401(k)  — and names his wife Sally Smith as beneficiary. They divorce and later John marries Susan Smith.

“If he does not change the beneficiary designation form, chances are excellent that the divorced spouse — Sally — will remain the beneficiary of the account and gets the money if he dies!

“This will not happen if your divorce lawyer has taken very careful steps to obtain a Qualified Domestic Relations Order.  If not correctly worked out, the money will go to the divorced spouse, not the current spouse,” Sterk points out.

“That’s why, for anyone with a substantial pension or retirement account, this is one good reason to have an experienced family law attorney handle your divorce and not do it yourself.”

Legal rules automatically update wills but not retirement accounts

“Beneficiary designations are designed to make it as easy for the custodian of the account to figure out who to pay.  But they can often frustrate what would have been the desires of, in this case, your reader’s father.

“With an ordinary will, there are a variety of legal rules which operate to update the will automatically to take into account one’s probable intent is in light of life changing events. For example, if one of your named beneficiaries dies, the assumption is that you would have wanted the beneficiary’s children to take his or her share, and Wills Doctrine makes that happen.

“Divorce? Then a provision in a will is deemed revoked as to the divorced spouse, so it is the present spouse who will take under the will.”

Advice to readers

For readers with a retirement account, Sterk recommends:

• Obtaining a copy of the beneficiary designation form or a new one. Be sure that as of today, the designation form is up-to-date.

• If you really want to be careful, go over the designation form with an estate planning lawyer because the steps to protect yourself are not intuitive. This is especially true if you have a significant amount of money in these types of accounts

• Beware of beneficiary designation forms. Most people are not in a position to recognize the difficulties with the forms – which are just fine if nothing changes from the time they are first filled out to the time you die.

“But things unfortunately do change, and most of us are not very good at updating,” Sterk cautions.

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.