How Divorce Changes Your Beneficiary Designations–Or Doesn’t

I’ve spent some time on my soapbox reminding people to keep their beneficiary designations up to date. The Missouri Court of Appeals, Western District, has provided some reinforcement on that point in Estate of Merritt v. Wachter, a decision that was released last week.

In this case, Mr. Merritt had a rollover IRA, and he was married to Ms. Wachter. While they were married, he made Ms. Wachter the beneficiary of that IRA.  A few years later, they divorced. Mr. Merritt requested change of beneficiary forms from the plan administrator numerous times, but he never got around to changing his beneficiary. Ms. Wachter argued that he did not intend to remove her as beneficiary, and that’s possible, but there’s really no way to know. Mr. Merritt died some 11 years later, never having changed his beneficiary. Ms. Wachter claimed the IRA on the grounds that she was the beneficiary, but Mr. Merritt’s estate also claimed that under Missouri law, the designation of Ms. Wachter was invalid because under Section 461.051.1 of the Revised Statutes of Missouri, a divorce automatically revokes a beneficiary designation naming an ex-spouse.

Here’s the relevant section of the statute:

If, after an owner makes a beneficiary designation, the owner’s marriage is dissolved or annulled, any provision of the beneficiary designation in favor of the owner’s former spouse or a relative of the owner’s former spouse is revoked on the date the marriage is dissolved or annulled, whether or not the beneficiary designation refers to marital status. The beneficiary designation shall be given effect as if the former spouse or relative of the former spouse had disclaimed the revoked provision.

So, the estate wins, right? The IRA owner made his then-wife the beneficiary, and they got divorced, so that beneficiary designation is no longer valid…but that’s not what the Court of Appeals held.

Why did the Court of Appeals decide that the beneficiary designation was still valid?

IRAs, like many other retirement plans, are governed by ERISA,  the Employee Retirement Income Security Act. Among ERISA’s provisions is a declaration that it is to preempt state retirement plan laws. As this decision pointed out, the U.S. Supreme Court dealt with this issue in Egelhoff v. Egelhoff, a case involving a similar dispute involving a Washington statute much like 461.051. Given that ERISA directly provided that it preempted state law and that, in the U.S. Supreme Court’s view, requiring plan administrators to be able to keep track of 50 sets of state pension laws is too burdensome (and that’s part of why ERISA exists), the state law did not apply. That same reasoning was applied by the Court of Appeals in this case to hold is Ms. Wachter’s favor.

What can we learn from this?

When your family changes, update your estate plan and beneficiary designations. Don’t rely on default rules like these to solve the problem; take control of your situation and determine who your beneficiaries will be. It’s easy to think that those updates are something you should get around to one of these days…until it’s too late. Beneficiary designations are nearly as easy to complete as they are to put off; why allow delays to cause a large problem that is so easy to fix?


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