Going through a divorce, even when the divorce is relatively amicable, is a stressful and emotional time. Not surprisingly, people often forget the entire ramification of severing their legal ties to their spouse. For example, people frequently overlook the importance of changing beneficiary designations after a divorce. Failing to take the time to do so can have costly unwanted consequences. Likewise, depending on the divorce decree to effectuate the changes can result in the same unwanted consequences.
The process of divorce has both an emotional and a legal component. The aim of the legal component is to turn what was once a single legal unit into two separate legal units. To do this, all of the marital assets and debts must be divided and assigned to one party or the other, including retirement plan benefits. As part of that process, the beneficiary designations need to be changed. The Marital Settlement Agreement that is incorporated into the final Decree may even specifically reflect those changes. However, when it comes time to pay out those benefits down the road, people are often surprised to learn that a now ex-spouse remains the beneficiary of record on the plan or policy.
The reason for this is that retirement plans governed under the Employee Retirement Income Security Act of 1974 (ERISA) must follow specific rules and provisions. Those rules and provisions will override terms found in a Marital Settlement Agreement. In fact, the ERISA rules will even override state laws that prevent an ex-spouse from inheriting, a common trend among states of late. As a result of the ERISA rules, your ex-spouse could easily wind up being the beneficiary of your retirement plan despite your express agreement to the contrary or even a state law forbidding such an inheritance.
The only exception to the ERISA override provision is if you and your spouse execute a Qualified
Domestic Relations Order, or QDRO, as part of the Marital Settlement Agreement. For a QDRO to be valid, it must contain very specific language as well as include a nomination for an alternate beneficiary.
In order to avoid a situation wherein your ex-spouse ends up receiving the benefits of your retirement plan or life insurance policy long after your divorce is final, it is crucial that you do not depend on the provisions found in the Marital Settlement Agreement. Be sure to change the beneficiary designations yourself.
If you have additional questions or concerns about how your divorce will impact your overall estate plan, or how to change your beneficiary designations, contact the experienced Illinois estate planning attorneys at Nash Bean Ford & Brown, LLP by calling 309-944-2188 to schedule your appointment today.