Beneficiary Designations - 5/16/08

Intro:   If you’re like most married people, you’ve named your spouse as the beneficiary of your IRA, 401(k), and insurance.  But what happens if you get a divorce and fail to take your ex-spouse’s name off these accounts?  Believe it or not, your ex-spouse, the one you don’t like, could wind up as your biggest beneficiary.  Here to explain how to protect yourself from an ex-spouse is attorney Mike Solomon.

Jeff:  Doesn’t a divorce automatically remove an ex-spouse as a beneficiary?

Mike:  In many cases, the answer is NO! For 401(k) plans, life insurance through work, and other employment – related benefits, a divorce does not change your beneficiary designations. 

Of course, you can contact the 401(k) administrator or company human resources administrator and physically remove your ex-spouse as a beneficiary.  But if you fail to do that before you die, your ex-spouse inherits.

A different rule applies to personal retirement accounts, like IRAs, and personally owned insurance.  For these, Ohio law does immediately remove your ex-spouse as your beneficiary. 

So here is the bottom line:  you have to actually physically remove your ex-spouse from your 401(k), but not from your IRAs or personal insurance.

Jeff:  Does that mean we can just forget about an IRA and personal insurance in a divorce?

Mike:  No.  It is still very important to physically change all of these beneficiary forms or you could cause your family a lot of extra income taxes, estate taxes and unnecessary probate costs.

For example, if you have a $200,000 life insurance policy and fail to name a new beneficiary after you divorce, the death benefit will pay to your estate and you could owe an extra $14,000 in Ohio estate taxes and you will incur thousand of dollars of extra probate costs all which you could have avoided just by naming a beneficiary.

Another example would be with your IRA.  If you don’t name a new beneficiary after you are divorced, the IRA will pay into your estate.  This causes two problems.  First, the IRA will have to liquidate within a year which could be an income tax disaster. Secondly, you will have to probate the IRA rather than avoid probate with a beneficiary designation.

Jeff:  This seems really complicated. Do you need a lawyer to help you with IRA and 401(k) beneficiary forms?

Mike:  Although you can fill these forms out yourself, I recommend that you consider seeking the help from someone with some experience filling out beneficiary forms such as your financial advisor, accountant or your attorney.  The forms are complicated, and the choices you make are important.  Everyone should review their beneficiary forms for their IRAs, 401k(s), life insurance and annuities and make sure that you have who you want as a beneficiary. Also, make sure you choose a contingent beneficiary in case your first choice is not available.