The fourteen-item post-divorce estate planning audit

A client’s divorce is final, and she asks her advisor what changes. The decree binds her and her former spouse. Unless it is a qualified domestic relations order, it does not bind the plan administrator, and it does not bind the insurer, the custodian, or the county recorder, each of which will act on the record it holds until someone changes it. What happens to each record after a divorce depends on which of three regimes governs it: federal law for ERISA-governed employer retirement plans, state law and the contract for other accounts and policies, and state law for the will and the trust. Counsel places each item in its regime before any form is submitted, and the advisor keeps the list.

Employer retirement plans

For a retirement plan governed by ERISA, the form on file controls, and a divorce decree that is not a qualified domestic relations order does not change it. In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan (2009), a participant named his wife as beneficiary of his employer’s savings plan in 1974, divorced her in 1994 under a decree in which she waived her interest in the plan, never changed the form, and died in 2001. The plan paid the balance, about $400,000, to the former wife, and a unanimous Supreme Court held that the administrator “did its statutory ERISA duty by paying the benefits to Liv in conformity with the plan documents.” The Court described “a straightforward rule of hewing to the directives of the plan documents” and noted that the plan “provided an easy way for William to change the designation, but for whatever reason he did not.” It left open whether the estate could then sue the former wife for the money.

State statutes that revoke a former spouse’s designation on divorce do not reach these plans. In Egelhoff v. Egelhoff (2001), a participant had named his wife as beneficiary of an employer life insurance policy and pension plan, divorced, and died without changing the forms; his children from a prior marriage sued under a state statute that revoked a spouse’s designation automatically on divorce. The Court held that ERISA preempts such a statute “to the extent it applies to ERISA plans,” because under it administrators “must pay benefits to the beneficiaries chosen by state law, rather than to those identified in the plan documents.”

Two mechanisms change who receives an ERISA retirement plan benefit after a divorce: a new beneficiary designation and a qualified domestic relations order (QDRO). A new designation must be filed with and accepted by the plan; for a participant who has married again, ERISA section 205 generally provides that a designation of anyone other than the spouse does not take effect without the spouse’s written consent, which must name the beneficiary and be witnessed by a plan representative or a notary. A QDRO is a domestic relations order that “creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits” and that meets the statute’s requirements (29 U.S.C. § 1056(d)(3)). A plan must pay according to a QDRO, and the Court in Kennedy treated enforcing one as enforcing the plan documents. A QDRO can also give a former spouse the survivor rights of a spouse. Which of these the decree contemplates, and whether the order has been submitted and qualified, are questions for divorce counsel and the plan administrator.

Other accounts and policies

For an IRA, an individually owned life insurance policy, an annuity, or a transfer-on-death account, state law and the contract decide. Many states have enacted a revocation-on-divorce statute modeled on section 2-804 of the Uniform Probate Code. Under the model text, a divorce “revokes any revocable” disposition or appointment of property to the former spouse in a governing instrument, and any nomination of the former spouse to serve as a fiduciary, unless the express terms of the instrument, a court order, or a contract dividing the marital estate provide otherwise. It also severs a joint tenancy with right of survivorship between the former spouses into a tenancy in common. A revoked disposition passes as if the former spouse had disclaimed it.

The model statute protects an institution that pays the former spouse before it receives written notice of the divorce. A payor “is not liable for having made a payment” to a beneficiary named in an instrument affected by the divorce before it “received written notice of the divorce, annulment, or remarriage,” is liable for a payment made after such notice, and the notice has to be sent by registered or certified mail or served like a summons. A former spouse who receives a payment they are not entitled to under the statute is obligated to return it. Until the institution receives notice in the statutory form it can pay the named beneficiary without liability, and a new form is what corrects its file.

The Supreme Court upheld one such statute against a Contracts Clause challenge in Sveen v. Melin (2018), where the policy had been bought before the statute was enacted and the divorce decree said nothing about it. The Court called the statute “a mere default rule, which the policyholder can undo in a moment,” reducing to “a paperwork requirement.” The opinion does not discuss ERISA, and Egelhoff still governs ERISA-governed employer plans. Which states have such a statute, what assets it reaches, and whether the client’s decree or account agreement overrides it are questions for counsel; the review records the answer for each item.

One tax point belongs on the list. A transfer of an IRA to a former spouse under a divorce or separate-maintenance decree, or a written instrument incident to one, is not treated as a taxable transfer, and the account is treated as the former spouse’s own afterward (IRC § 408(d)(6)). A withdrawal and a check to the former spouse is a different transaction. Divorce counsel and the tax advisor confirm how the transfer is made.

The will and the trust

Under the model probate code, the divorce revokes the will’s and the trust’s revocable gifts to the former spouse and the former spouse’s relatives, and any nomination of the former spouse or a relative of the former spouse as executor, trustee, guardian, or agent, again unless the express terms of the instrument, a court order, or a marital-estate contract provide otherwise. The Court in Sveen noted that revocation-on-divorce rules for wills had been adopted by almost all states by the 1980s; how far a state’s statute reaches trusts, the former spouse’s relatives, and fiduciary nominations varies. Either way the documents still name the former spouse, and a reader who does not know the statute will not know the gift is gone. Estate counsel’s review says which provisions remain effective, which are revoked by operation of law, and which should be amended, restated, or replaced so that the documents say what the client now intends, including new fiduciaries and a new guardian nomination for minor children.

The fourteen-item list

Work through the list with divorce counsel, estate counsel, and each institution. Some items need a new form; some need confirmation that the existing record is right; each gets an owner and a date.

The timing question is for divorce counsel. A change submitted while the case is open can conflict with an order entered in it or with the eventual decree; a change left until after the decree is entered can be too late for a client who dies in between. Counsel says when each item may be changed, and the advisor tracks that each one was.

Closing each item with evidence

An item is closed when the institution’s record shows the change the client instructed: a confirmation of the new designation, a determination letter on the qualified order, a recorded deed, a custodian’s statement showing the transfer. A submitted form is not a closed item. Keep the current record, the client’s instruction, and the institution’s response together, and where the institution’s record conflicts with counsel’s reading of the decree, leave the item open and send the conflict to counsel. Beneficiary forms drift on their own, which beneficiary designation drift covers.

How Bancroft handles it

The household updates its own asset inventory and its questionnaire answers, so the people named in the documents reflect what the client now intends. Restating the trust is free on every plan, and a new questionnaire produces the restated trust, and any replacement document, from the same library with the household’s new answers; what the documents should now say is the estate counsel’s review described above. For accounts the client marks for the trust, the platform drafts funding letters that ask the custodian or insurer for its own beneficiary or retitling forms, the household mails them and uploads the institution’s confirmation, and the advisor sees which requests are confirmed and which are open.

To see the inventory, the funding task list, and the review flow on a sample household, book a demo.