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Why It is Important to Know the Rules

Divorce just coupleChances are that setting up the retirement plan your employer offered as an incentive came very early in your career…

…It could be that when you initially signed up for a retirement plan you were married to your ex-spouse. Chances are equally good that you designated your spouse at the time as the beneficiary. Relax, you tell me, Virginia is one of those state with a revocation statute. The statute allows the plan administrator to ignore any beneficiary designation to an ex-spouse and allows the proceeds to pass to the ‘heirs-at-law’.  While it is never as simple as that sentence would have you believe, the statute is absolutely worthless to your heirs if your retirement plan was based on the Employee Retirement Income Security Act (ERISA), a federal law that trumps the state statute every time.

All you need do is look at the decisions made by the United States Supreme Court to learn that most of the time, even when there is a revocation upon divorce statute in your state’s code, the disposition of these assets is governed by federal law. The Supreme Court has overruled state law on this issue no less than 5 times in the last 50 years.  To stack the deck even further, typically, any litigation of these cases is in federal court.  In 2009, the Supreme Court issued a unanimous decision, in which it held that because ERISA requires the plan administrator to strictly adhere to the plan that a divorce decree was not enough to overrule the terms of the plan (for you legal beagles out there, yes, a QDRO works).   Simply put, where the benefit plan provides for a specific procedure for designating beneficiaries and for revoking and replacing those beneficiaries, the administrators must ignore any deviation from those procedures.

All of this is to say that it is imperative that you review all of your assets and to whom you intend to give them at your death whenever there’s a major life event like a birth, adoption, death, marriage or divorce. This quick check-up may save those you leave behind a lot of hard feelings, trouble and expense.

While you’re at it, here are several other things to consider:

  1. Rather than listing a young adult as a beneficiary, ask an estate planning attorney about drafting a trust to detail exactly how you want the money to be disbursed.
  2. Do not designate a minor as a beneficiary because life insurance policies won't pay minors directly. Consider a similar inheritance trust under your living trust.
  3. Remember you need to list a contingent beneficiary: if the primary beneficiary dies before you, you need a backup.
  4. Want to list someone other than your spouse as the beneficiary on a 401(k) plan? Unless your spouse agrees, by law, you are not allowed to do this.
  5. Failing to do estate planning creates ambiguity and means more headaches and fees for your family.

As an experienced estate planning law firm, we can help you navigate all of the ins and outs of estate planning, giving you peace of mind and helping you demonstrate to those you leave behind that you cared enough to tackle these matters.  To learn more on this issue or related topics of importance to you and your loved ones, register online for one of our workshops.

Reference: ABC 15 Arizona (July 17, 2016) “Beneficiary designation: Don't set it and forget it or your ex could end up with your life savings”

 

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Update to our Process

The unprecedented coronavirus pandemic has taken our entire country by surprise. We understand how difficult this time is for America’s businesses and families.  However, we believe it is vitally important that we make every effort possible to continue to offer solutions that avoid disrupting our important partnership with you, your family and friends.  As you know, estate planning is not something that should wait for a more convenient time, therefore the opportunity to address your important goals both during and after this crisis should not wait.  To that end, we have added the option of a ‘virtual consultation’ to our office process.  You will now have a choice of either meeting with us in our office or in the comfort of your own home.