Most people assume a will governs everything they own. For a great many households, the will governs the smaller half.
Life insurance, retirement accounts, annuities and payable-on-death accounts all pass by contract. The carrier or the plan administrator pays whoever is named on the form. A will has no authority over any of it, and neither, in many cases, does a divorce decree.
The two decisions
The Supreme Court has addressed this twice, and both times the money went to the ex-spouse.
In Egelhoff v. Egelhoff, decided in 2001, David Egelhoff named his wife as beneficiary of his employer life insurance and pension plan. They divorced. He died weeks later without changing the forms. Washington had a statute that automatically revoked a spousal beneficiary designation on divorce, and his children from a prior marriage argued the statute made them the beneficiaries.
The Court held 7 to 2, in an opinion by Justice Thomas, that ERISA preempted the state statute. The statute “binds ERISA plan administrators to a particular choice of rules for determining beneficiary status,” requiring that “administrators must pay benefits to the beneficiaries chosen by state law, rather than to those identified in the plan documents.” ERISA requires the opposite. The ex-wife received the money.
In Hillman v. Maretta, decided in 2013, the same pattern under the Federal Employees’ Group Life Insurance Act. Warren Hillman named his wife, divorced, remarried, and died without updating the form. Virginia had a statute letting the current spouse sue the named ex-spouse to recover the proceeds.
Justice Sotomayor, writing for the Court, held the statute preempted: “Congress has spoken with force and clarity in directing that the proceeds belong to the named beneficiary and no other.” The widow recovered nothing.
Both cases turned on federal statutes covering employer-sponsored and federal-employee benefits. Individually owned life insurance is governed by state law, and many states do have revocation-on-divorce statutes that reach it. Whether one applies to your policy depends on your state, your contract and how your decree was drafted, which is exactly the kind of uncertainty nobody wants their family litigating.
The practical rule survives all of the legal nuance: the form is what pays.
What passes by designation
More than most people list when asked.
- Individual life insurance
- Group life insurance through an employer, which is frequently the oldest and most forgotten form of all
- 401(k), 403(b) and other employer retirement plans
- Traditional and Roth IRAs
- Annuities
- HSAs
- Pension survivor elections
- Payable-on-death bank accounts and transfer-on-death brokerage accounts
- Some 529 plans, depending on the state and the plan
Everything on that list has its own form, filed with its own institution, and none of them talk to each other. A person who changes their will has changed nothing on that list.
The five failures that actually happen
The ex-spouse is still named. The most common and the most expensive. Old group coverage at a former employer is where it hides.
There is no contingent beneficiary. If the primary dies first, the policy pays according to the contract’s default order, which usually ends at the estate. A contingent takes thirty seconds to add and it is the single highest-value line on the form.
The estate is named. Sometimes deliberately, usually by default. It takes money that would have passed outside probate, exempt from the deceased’s creditors, and puts it inside probate and behind those creditors. It also delays payment by months.
A minor is named outright. No insurer will hand a large sum to a child. A court appoints a guardian of the property, that person answers to the court, and the entire balance goes to the child on a birthday. A trust named as beneficiary solves it and lets you decide the timing.
A beneficiary with a disability is named outright. A lump sum can disqualify somebody from means-tested benefits. A properly drafted special needs trust does not.
Per stirpes, and why the phrase matters
Most forms let you specify how a share passes if a beneficiary dies before you do.
Per stirpes sends that beneficiary’s share down to their children. Name three children per stirpes, and if one predeceases you leaving two children of their own, those grandchildren split their parent’s third.
Per capita divides among the surviving named beneficiaries. In the same situation the two surviving children take half each and the grandchildren receive nothing.
Neither is right in the abstract. What is wrong is not knowing which one your form says, because the default varies by contract and it is usually per capita.
The audit
This takes an afternoon and it is the highest-value hour in most people’s estate planning.
- List every account and policy. Include old employers. Log in and read the actual designation on file rather than trusting your memory of what you filed.
- Check primary and contingent on each one. Fill in every blank contingent.
- Check for a minor named outright anywhere on the list.
- Check for an ex-spouse. Everywhere.
- Decide per stirpes or per capita and write it on the form rather than leaving the default.
- Confirm the institution actually has it. A form you completed and filed at home is not on record. Ask for written confirmation of the designation currently held.
- Tell somebody. A benefit nobody knows about is a benefit nobody claims.
Then set a reminder to repeat it after any marriage, divorce, birth, death or job change. Those five events are what make designations stale, and four of them are happy occasions when nobody is thinking about paperwork.
Where we fit
This is not a sales exercise and it does not require buying anything. Apex reviews designations on every case we write, and on existing policies clients bring us, including ones written elsewhere.
If you want a second set of eyes on your list before anyone has to claim on it, talk to a member of our team. You can also read how a death benefit passes outside probate and what an intestacy statute does.
Nothing here is legal advice. Beneficiary and probate law varies by state and by plan. Talk to an attorney licensed where you live. No policy is bound until a carrier issues it in writing.
