Beneficiary Designations and Divorce (in Arizona)

We recently heard from a reader about the effect of divorce on beneficiary designations. It’s a topic that comes up from time to time — and it’s more complicated than you might think. And, to be clear, the answer is very state-specific — so what we tell you here might not be accurate outside Arizona.

Divorce and “governing instruments”

Arizona law is clear (though the effects are often less clear). Divorce invalidates beneficiary designations naming a spouse, as well as wills and even joint tenancy. The law does that by identifying “governing instruments” that are affected by the marital dissolution. Governing instruments include beneficiary designations, insurance and annuity contracts, rights of survivorship — and wills and trusts, too.

“Legal separation” — even if there is a court decree involved — is not a divorce in Arizona. So you could go through a division of property in a court proceeding, and your (separated) spouse could still receive your life insurance, or retirement account, or whatever.

The Arizona law invalidating beneficiary designations after divorce does not mean it is not important to actually change designations. Of course, if you do not want your ex-spouse to receive your life insurance, stock or bank account, or insurance payout — the very best thing you can do is to change the beneficiary designation after your divorce.

Does this include retirement accounts?

Well, yes and no. Retirement accounts are a special category. If the retirement benefit is governed by ERISA — the federal Employee Retirement Income Security Act (adopted in 1974 and modified numerous times since then), the rules are different. Why? Because ERISA is a federal law, and it preempts Arizona (and other state) laws.

So if you want your ex-spouse to no longer be a beneficiary on your ERISA-governed retirement account, you have to do something about it. That is usually accomplished in the course of the divorce by creating a Qualified Domestic Relations Order — a QDRO. But that’s beyond the scope of our discussion today. Just know that you MUST follow up post-divorce to change beneficiaries on most retirement accounts.

What if you want your ex to receive benefits?

We see this pretty often, actually. Just because a couple divorces it does not necessarily follow that they want their beneficiary designations changed. But the law doesn’t have an “unless you don’t want it to apply” exception. Divorce undoes all beneficiary designations.

Of course, you could renew your beneficiary designation after your divorce, and make it clear that you want your ex-spouse to receive the same benefit. The mechanics of doing this vary by asset type (and governing instrument — see above).

Some of the techniques for renewing your choices are obvious. You still want to name your ex-spouse as beneficiary in your will or trust? You can “re-publish” the documents (that can be as simple as a new signing of the exact same text) after the divorce. Or you could sign a new will or trust including language describing exactly what you are doing. “Although my ex and I are now divorced, I name him/her as beneficiary of my will,” you might write (that’s illustrative, not the actual text you would want to use).

What if your ex has already died, and you’re still named?

Let’s take that one step further. Suppose you and your ex-spouse live together in a home you have owned as joint tenants (with right of survivorship) since before the divorce, and you have continued to name one another as beneficiary on your life insurance contracts and beneficiary designations. And “everyone knows” (we lawyers hate that formulation — in our experience, not everyone always knows) that you intended to keep those beneficiary designations in place. When your ex dies, can you claim the joint tenancy property and the accounts with you named as beneficiary?

Maybe, but it’ll be an uphill battle. The divorce terminated those designations. Your ex (and you) of course had the right to reconfirm the designations — but did your ex actually do anything to do that? This will end up being a question of fact for a judge (and possibly even a jury) to decide. What does the weight of the evidence indicate? And remember that you will have the burden of affirmatively proving your ex’s intent. “Burden of proof” settles many a legal dispute. You might have a perfectly cogent argument, but not enough to overcome your obligation to show that your view is more likely correct than not correct.

So what is the actual effect of the disinheritance?

It’s more than a disinheritance, actually. Dissolution (or annulment) of a marriage causes any beneficiary designation, will or trust to be invalidated as to the ex-spouse. It also terminates the ex-spouse’s right to act as agent under a power of attorney, personal representative under a will or trustee or successor trustee.

Of course, a married couple might have created a joint estate plan. Perhaps they named themselves as co-trustees of a joint revocable trust. Any beneficiary designation is terminated by the divorce, and so is the joint trusteeship. It is critically important to take care of estate planning documents in the course of finalizing the divorce, to avoid unintended consequences. But divorce revokes a joint revocable trust, and gives each spouse control of their share of the property.

If you receive property under a will, you have the right to “disclaim” any inheritance. Same for beneficiary designations and rights of survivorship. Divorce acts like a disclaimer — it is as if you had predeceased your ex-spouse. And the same for members of your family (at least those who are not also members of your ex-spouse’s family) — though there can be some special considerations for stepchildren.

And remember: this is Arizona law. If you are in a different state, your rules may be similar, different, exactly the same — we don’t know which.

What’s the lesson here?

Don’t leave us guessing. Make your wishes clear. Want to leave something to your ex-spouse? Sign a new will, a new beneficiary designation, a new trust and new powers of attorney after the divorce. Mention that you’re doing this intentionally.

Do you want the default rules to apply? That is, you want to end any involvement with your ex-spouse? Sign a new will, a new beneficiary designation, a new trust and new powers of attorney after the divorce. This is especially important for your retirement benefits (IRAs, 401(k)s, etc.).

In other words, update your estate planning after you’re divorced. Regardless of what you’re going to say in your governing instruments. Don’t leave your beneficiary designations unresolved after a divorce.