WIll My Ex Get My Employee Benefits?

The majority of married people leave their assets to their spouse at death.  A husband typically has a will leaving his assets to his wife at death and will generally name her as the beneficiary of his life insurance and retirement plans, and vice-versa.  But what happens in the event of divorce?  Can the ex still receive the assets?

The answer with regard to a will is no.  The Illinois Probate Act provides that if a person divorces after signing a will, then all gifts to the divorced spouse are revoked.  Appointments as executor and trustee are also revoked.  However, this section of the Probate Act only applies once a judgement for divorce has been entered by the court.  Some divorces can take years to complete.  If a husband dies while a divorce is pending with a will leaving assets to his wife, the wife will receive the assets under the will.  Therefore, the best course of action is to have new estate planning documents prepared as soon as possible after deciding to get divorced.

There is no corresponding provision in the Illinois Trusts and Trustees Act regarding divorce.  So, if your estate plan uses a living trust instead of a will, Illinois law will not exclude your ex-spouse.

The will, however, is usually just the tip of the iceberg.  These days, it is common for most of a person's wealth to be held in retirement accounts, life insurance policies or similar assets which name a beneficiary to receive the assets at the owner's death.  Even if your ex will receive nothing under your will at your death, he may still receive your retirement plans or life insurance proceeds.

Most employer provided retirement plans, such as 401(k)s, are governed by the federal Employee Retirement Income Security Act ("ERISA").  (One exception is government employers such as the state or the city.)  ERISA overrides all state and local laws regarding qualified retirement plans.  ERISA requires that a married participant in a retirement plan name his spouse as the beneficiary of the plan unless the spouse signs a very specific waiver allowing another beneficiary to be named.

ERISA does not revoke the designation of the spouse on divorce, a fact confirmed by some recent Supreme Court cases.  In 2001 the Supreme Court decided Egelhoff v. Egelhoff.  David and Donna Egelhoff were residents of Washington State.  They divorced in 1994, and in the divorce  judgment Donna waived all of her rights to the proceeds of David's employer sponsored retirement plan and life insurance.  In addition, Washington State had a law revoking the designation of a spouse as beneficiary of a retirement plan or life insurance policy in the event of divorce.  David died in a car accident less than three months after the divorce without changing his beneficiary designations.  His children from a prior marriage claimed the retirement account and the life insurance proceeds, but so did Donna.  The Washington Supreme Court followed the Washington statute and awarded the retirement plan and insurance proceeds to David's children.  The U.S. Supreme Court reversed, holding that ERISA preempted the state statute.  Because David did not follow the requirements of his plan by filing a written change of beneficiary, the designation of Donna as beneficiary was not revoked.

The Court's reasoning was that plan administrators need a national uniform system to administer retirement plan benefits and that the payment of benefits cannot be affected by facts such as the residence of the participant.  Plan administrators must be entitled to rely on the terms of their plan.  In the Egelhoff case, the plan required a written change of beneficiary.  Because David had not followed the plan requirements, the designation of Donna as beneficiary remained in place.

Employers could include a provision in their plans that revokes the designation of a spouse in the event of divorce.  However, that would put a burden on the plan administrator to determine the status of each decedent's marriage at death and result in liability if the plan assets were paid to the wrong person.  Therefore, it is not likely that this provision will be included in many qualified plans.

The result in Egelhoff would have been different under Washington law for an individual retirement account.  IRAs are not governed by ERISA, so state law would apply.  However, Illinois has no such law revoking the designation of a spouse upon divorce.  Therefore, once you have decided to get divorced (even before you file if you are certain), you should change the beneficiaries of your IRAs and non-ERISA life insurance policies.  (You cannot change the beneficiary of ERISA plans without your spouse's consent until after the divorce.)

The U.S. Supreme Court reaffirmed its position in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan decided in January 2009.  As in Egelhoff William and Liv Kennedy divorced in 1994 and William failed to change his beneficiary designation on a qualified savings and investment plan with his employer.  When William died in 2001, Liv claimed the proceeds of the account, and the Court agreed that she was entitled to them.  Although the divorce decree stated that Liv was divested of all right, title, interest and claim in and to any retirement plan or pension plan, such language was not binding on the plan administrator.  The Court held that the a divorce order is only binding on a plan administrator if it is Qualified Domestic Relations Order ("QDRO"), and the Kennedy divorce decree did not qualify.  (QDROs are governed by federal law.  In addition Illinois has certain requirements, so you will need a Qualified Illinois Domestic Relations Order (QILDRO) in Illinois.)

As with everything legal, there are exceptions.  For example, an Illinois statute provides that the designation of a spouse as a beneficiary under the Illinois Municipal Retirement Fund is revoked on divorce.  If you have any questions regarding your plan, you should check with your employer.  However, it is always advisable to execute a new beneficiary designation as soon as possible in the event of divorce.

The bottom line is that in the event of divorce, you want a QILDRO from the Court and you also want to update your entire estate plan as soon as possible.  Otherwise your ex and his or her new twenty-year-old boyfriend or girlfriend may be enjoying your hard earned benefits.