Many divorced people overlook the need to plan their affairs differently after the divorce.
“Mary” divorced her husband while her three children were minors. Understandably, she did not want to list her minor children as her life insurance beneficiaries. If Mary passed away and the insurance paid to her minor children, the court would require a conservatorship, a cumbersome, expensive, and frustrating experience and her ex-husband might very well be appointed the conservator to manage the money for the children. And once the children turned 18, they would have complete control of the money. Neither result would be good. So with the best of intentions, Mary selected her sister as life insurance beneficiary, thinking that her sister would use the proceeds to help the children.
Mary passed away when the youngest child was 18 and living at home. The children had planned to use much of the life insurance death benefit to pay off the mortgage, because the children could not afford to pay it on their own. Because Mary never changed her life insurance beneficiary, her sister inherited the life insurance death benefit and quickly decided to keep it for herself. Though the children tried to collect the insurance death benefit from their aunt, they had no recourse when she refused to pay. Had Mary known to seek planning help, she could have arranged for the life insurance death benefit to be available for her children’s benefit without relying on a friend or relative who was not obligated to follow her wishes.
“Sarah” divorced her “deadbeat” and abusive husband and began to get her life back on track. She quickly became successful at work and saw her salary rise accordingly, and still found the time and energy to raise her children by herself. She updated her will and arranged for a trusted friend to become her children’s guardian if she died while they were minors. Tragically, Sarah was killed in a car accident a few years later while the children were still minors. Unfortunately, she had never changed her 401K plan beneficiary after her divorce. By law, neither her will nor her divorce overrode her previous 401K beneficiary designation, which meant that her 401K assets passed to the listed beneficiary—the “deadbeat” ex-husband—rather than her children. The children never saw any of the 401K savings. Had she known that good planning included coordinating her beneficiary designations with her estate plan, her 401K savings could have been used for her children’s benefit rather than given outright to her “deadbeat” ex-husband.
“Janet” and “Martin,” both retired, divorced amicably a few years ago. Janet was listed as the life insurance beneficiary on her husband’s policy when they divorced. Martin and Janet both wanted to keep Janet as Martin’s life insurance beneficiary even after the divorce, so Martin left the life insurance beneficiary designation alone. However, when Martin died a couple of years later, the life insurance death benefit did not go to Janet, even though she was listed as the designated beneficiary. Upon divorce, Arizona law severs many spousal roles, including when the ex-spouse is listed as the life insurance or IRA beneficiary. (As Sarah’s story above shows, Arizona law does not sever an ERISA plan spousal beneficiary designation upon divorce because that plan follows federal law.) Had Martin created a new life insurance beneficiary designation listing Janet as beneficiary—after the divorce, or had the marriage dissolution contract expressly stated that Janet would be the life insurance beneficiary, Janet would have received the death benefit after Martin died.
If you are divorced and haven’t reviewed your affairs with an estate planning attorney, please make an appointment with one. Having an effective plan is especially important if you have loved ones whom you want to protect, or if you depend on another’s planning.