Beneficiary Designation Review: Florida, Divorce and Your 401(k)

A year-end beneficiary designation review is one of the simplest things you can do for your family, and it matters most if you have been divorced or remarried. Florida law automatically cancels many designations that name a former spouse. It does not reliably do that for a 401(k), pension or group life policy from your employer, because federal law controls those plans and the plan pays whoever is named on its form.

IRAs, 401(k)s, life insurance, annuities and payable-on-death or transfer-on-death accounts pass by beneficiary designation, not by your will. We covered the basic mistakes (no contingent beneficiary, naming the estate, naming a minor) in our earlier post on the beneficiary designation problem. This post focuses on what changes when a marriage begins or ends.

What Florida's divorce statute does

Florida has a revocation-on-divorce statute for non-probate assets. Under Fla. Stat. § 732.703, if you named your spouse as beneficiary before the divorce, that designation becomes void when the marriage is dissolved or declared invalid. The asset then passes as if your former spouse had died before you, which usually means your contingent beneficiary takes it.

The statute applies to these assets owned by a Florida resident at death:

• Life insurance, annuities and similar contracts, whether or not held in an employer plan
• Employee benefit plans
• IRAs and Roth IRAs, including individual retirement annuities
• Payable-on-death accounts
• Securities or accounts registered in transfer-on-death form

It applies to anyone dying on or after July 1, 2012, no matter when the designation was signed. Florida has parallel rules for wills (Fla. Stat. § 732.507(2)) and revocable trusts (Fla. Stat. § 736.1105), which treat provisions for a former spouse as if that spouse had died at the time of the divorce.

The exceptions that matter

Section 732.703 is a safety net with holes. Subsection (4) lists situations where it does not apply, including:

• Federal law controls. The statute steps aside "to the extent that controlling federal law provides otherwise." This is the big one, discussed below.
• A new designation after the divorce. The statute only voids designations made before the divorce. If you sign a new form after the divorce that expressly names your former spouse, it stands.
• Court orders and settlement terms. If the divorce order requires you to keep the asset for your former spouse or your children, or if under its terms you could not change the asset or its beneficiary on your own, the statute may not apply.
• Irrevocable designations, other states' law and joint accounts. It does not apply if the designation is irrevocable under applicable law, if the governing instrument is governed by another state's law, or to jointly owned assets with survivorship rights.
• Remarrying the same person. If you remarry your former spouse and are married at death, the designation stands.
• Florida Retirement System plans. State-administered retirement plans under chapter 121 are expressly excluded.

There is also a practical gap. The statute protects banks, insurers and plan payors who pay according to the form under rules set out in the statute. If an institution pays your former spouse anyway, the statute does not erase your family's claim to the money, but recovering it from your former spouse is a dispute nobody wants.

Why your 401(k) can still pay your ex-spouse

Most 401(k) plans, private-employer pensions and group life insurance you get through work are governed by ERISA, the federal Employee Retirement Income Security Act. ERISA's preemption clause says it supersedes state laws "insofar as they may now or hereafter relate to any employee benefit plan" it covers (29 U.S.C. § 1144(a)). ERISA's definition of a welfare plan includes employer programs providing benefits in the event of death, which is why employer group life insurance is in the same category.

In Egelhoff v. Egelhoff, 532 U.S. 141 (2001), the U.S. Supreme Court considered a Washington statute much like Florida's, which automatically revoked a spouse's designation on divorce. The Court held that ERISA preempted it as applied to an employer's life insurance and pension plans, because the statute made administrators pay "the beneficiaries chosen by state law, rather than … those identified in the plan documents."

Eight years later, in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 U.S. 285 (2009), the facts were even more striking. The ex-wife had given up her interest in her husband's employer savings plan in the divorce decree. He never changed the beneficiary form, which still named her. The Court held that the plan administrator properly paid her, because "ERISA provides no exception to the plan administrator's duty to act in accordance with plan documents." The Court expressly declined to decide whether the estate could later sue the ex-wife for the money.

The lesson is simple. For an employer plan, the beneficiary form on file with the plan is what counts. A divorce decree, a settlement agreement or Florida's statute may not change who the plan pays. If your divorce settlement deals with retirement or life insurance, make sure the plan's own paperwork reflects it.

Two notes. Governmental plans, such as the Florida Retirement System or a county pension, are not ERISA plans (29 U.S.C. § 1003(b)(1)), and Florida's statute excludes the Florida Retirement System, so those beneficiary forms need the same attention. And an IRA you set up yourself is generally not an ERISA plan under Department of Labor regulations (29 C.F.R. § 2510.3-2(d)), so § 732.703 can reach it. Even so, updating the form is far more reliable than counting on a statute.

Remarriage: your new spouse may have rights you did not choose

The federal rules also work in the other direction. For most 401(k)s and similar defined contribution plans, federal law requires the plan to pay the account at death to your surviving spouse unless your spouse consents in writing to a different beneficiary (29 U.S.C. § 1055(b)(1)(C); 26 U.S.C. § 401(a)(11)). The consent must acknowledge its effect and be witnessed by a plan representative or a notary.

Two details catch people in second marriages:

• A prenuptial agreement does not satisfy this consent requirement, even if it waives retirement rights. Treasury regulations say an agreement signed before the marriage does not count.
• A consent signed by one spouse binds only that spouse. If you remarry, the old consent from a prior spouse does not carry over.

So if you remarried and want your 401(k) to go to children from an earlier marriage, a new form alone may not be enough. Your current spouse's signed, witnessed consent is generally required. This is a common issue in planning for blended families.

A year-end beneficiary designation review checklist

Set aside an hour before December 31 and gather the current beneficiary confirmation for every account that has one: 401(k), 403(b) and 457 plans, pensions, IRAs, life insurance (personal and through work), annuities, and any POD or TOD bank or brokerage accounts. Then check:

1. Primary and contingent beneficiaries. Is every person named still living and still the person you want? Is there a contingent for every account?
2. Former spouses. Any form signed before a divorce should be replaced, whether or not Florida's statute might cover it.
3. New spouse. If you remarried, decide what you want and whether spousal consent is needed on employer plans.
4. Minors. A minor cannot manage an inheritance directly. Florida lets parents receive up to $15,000 in total for a child without court appointment (Fla. Stat. § 744.301(2)); larger amounts can require a guardianship of the minor's property. Naming a trust for the child, or a custodian under the Florida Uniform Transfers to Minors Act (Fla. Stat. § 710.104), avoids that.
5. Estate or trust. Naming "my estate" usually sends the money through probate. Naming your revocable living trust can coordinate the account with the rest of your plan, but retirement accounts left to trusts raise tax questions worth discussing first.
6. Written confirmation. After you submit a change, get a written confirmation from the plan or custodian and keep it with your estate planning documents.

Repeat the review after any marriage, divorce, birth, adoption or death in the family, and whenever you change jobs or roll a 401(k) into an IRA.

How we can help

Yergey & Yergey, P.A. has served Central Florida families since 1928. We can review your beneficiary designations alongside your will, trust and any divorce or prenuptial agreement so that they work together. If you have been divorced, remarried or have children from more than one marriage, we would be glad to walk through your accounts with you. Consultations are available at our Orlando office, by phone or by video.

Frequently asked questions

Does my divorce decree remove my ex-spouse from my 401(k)?

Not by itself. Under Kennedy (2009), the plan administrator follows the plan's beneficiary form. Change the form, and follow any plan procedures your divorce settlement requires.

Does Florida's statute apply if my ex-spouse is named on my IRA?

Generally yes, if you were a Florida resident at death and none of the exceptions applies, because an individually established IRA is generally not an ERISA plan. Still, update the form rather than relying on the statute.

I am a state employee. Does any of this apply to my FRS benefits?

FRS plans are governmental plans outside ERISA, and Florida's divorce statute expressly excludes them. Review your FRS beneficiary designation directly with the plan.