Does a Divorce Decree Override a Named Beneficiary?

After a divorce, one overlooked issue is the status of a former spouse as a named beneficiary on financial accounts and life insurance policies. If an account holder dies without updating these forms, a conflict can arise between the divorce decree and the beneficiary designation. Which document holds authority depends on the type of asset and the laws that govern it.

The Primacy of the Beneficiary Designation Form

A beneficiary designation form is a contract between an account owner and a financial institution. When opening a retirement account, buying a life insurance policy, or setting up other investment accounts, you complete this form. Under its terms, the institution is obligated to transfer the assets to the named person upon the owner’s death.

This contract operates independently of other estate documents, including a will. For example, if a will leaves all assets to a child, but an ex-spouse is still named on a life insurance policy, the policy proceeds will go to the ex-spouse. The financial institution’s duty is to honor the beneficiary form, not interpret intentions from a will.

Courts uphold the clear language of a beneficiary designation, treating it as a direct instruction for a specific asset. This allows the funds to bypass the lengthy probate process. The institution’s role is to verify the death and distribute the funds to the named party, making the form the controlling document unless a specific law says otherwise.

State Revocation-on-Divorce Statutes

Many states have “revocation-on-divorce” statutes to address the failure to update beneficiaries after a divorce. These laws create an automatic legal remedy by treating the former spouse as if they had predeceased the account owner. This effectively nullifies the beneficiary designation for the ex-spouse.

When this type of statute applies, the asset does not go to the ex-spouse. Instead, the financial institution pays the proceeds to the contingent beneficiary. If no contingent beneficiary was named, the asset becomes part of the deceased’s estate and is distributed according to their will or state intestacy laws.

These state laws have a limited scope and apply only to assets governed by state law, such as IRAs, non-employer-sponsored life insurance, and accounts with payable-on-death (POD) or transfer-on-death (TOD) instructions. Not all states have these laws, and their specifics can vary, making them an unreliable safety net.

Federal Preemption and ERISA-Governed Plans

The rules are different for employer-sponsored retirement plans like 401(k)s and pensions, which are governed by the federal Employee Retirement Income Security Act of 1974 (ERISA). A feature of ERISA is its preemption clause, which means federal law supersedes any state laws related to employee benefit plans. This renders state revocation-on-divorce statutes ineffective for ERISA-covered assets.

The purpose of ERISA preemption is to create a uniform system of plan administration for companies that operate in multiple states, avoiding the burden of tracking different state divorce laws. ERISA establishes a single rule: plan administrators must distribute assets strictly according to the plan’s documents. This means if an ex-spouse is the named beneficiary on a 401(k), the plan is legally required to pay the benefits to them, regardless of a state law or divorce decree.

The U.S. Supreme Court affirmed this principle in Kennedy v. Plan Administrator for DuPont Sav. and Investment Plan. In that case, the Court held that plan administrators must follow the beneficiary designation on file, even if a divorce decree includes a waiver of benefits. This ensures simple and efficient plan administration.

A divorce decree, on its own, cannot remove an ex-spouse as the beneficiary of an ERISA-governed plan. Federal law establishes that the beneficiary form is the final authority. The person named on the form will receive the funds unless a specific legal instrument recognized by ERISA is used.

How a Divorce Decree Can Control Assets

The only way for a divorce decree to legally control assets in an ERISA-governed plan is through a specialized court order called a Qualified Domestic Relations Order (QDRO). This is the only exception recognized by ERISA that allows a plan to pay benefits to someone other than the participant or their named beneficiary.

A QDRO is a judgment related to child support, alimony, or marital property rights. It directs a retirement plan to pay benefits to an “alternate payee,” who is typically the former spouse or a child.

A standard divorce decree is not a QDRO. A settlement might state that one party is awarded 50% of the other’s 401(k), but this language is insufficient for a plan administrator to act. To be valid, a QDRO must contain specific information, including the names and addresses of the participant and alternate payee, the plan name, and the exact amount or percentage of benefits to be paid. It also cannot require the plan to provide a benefit type not otherwise offered.

The drafted order is sent to the plan administrator for review. If the administrator deems the order “qualified,” they will recognize the alternate payee’s right to the assets. Without a QDRO, a divorce decree is simply an agreement between two people and not a directive the plan can follow.

Updating Beneficiary Designations Post-Divorce

Relying on state laws or assuming a divorce decree will handle asset distribution is not a reliable strategy. The most effective way to ensure assets are transferred according to your wishes is to proactively update all beneficiary designation forms. This process provides certainty and prevents future legal conflicts for your heirs.

• Create a comprehensive inventory of every asset with a beneficiary designation, including retirement accounts, life insurance policies, annuities, and bank accounts.
• Contact each financial institution or plan administrator to request their specific change-of-beneficiary forms, as many require a physical form with a signature.
• Complete the new forms with all required information for your new primary and contingent beneficiaries.
• Submit the signed forms according to the institution’s instructions and follow up to confirm the changes have been processed and are reflected in your account.