The $1.4 Million Beneficiary Mistake That Blindsides Divorced Retirees

A traditional IRA is governed by the beneficiary designation on file with the custodian. Even when a will and a divorce decree state different outcomes, the custodian pays according to the named beneficiary. This result follows contract principles and has been reinforced by the U.S. Supreme Court in Kennedy v. Plan Administrator for DuPont (2009), requiring plan administrators to follow the beneficiary form even if a divorce decree says otherwise. Automatic revocation on divorce statutes may apply in some situations, but they often do not cover ERISA plans and may not reach IRAs held at brokerages in other states. As a result, outdated beneficiary forms can cause large unintended transfers.

"The beneficiary designation that you may have for an IRA or anything like that trumps whatever you put in your will."

"An IRA is a contract between you and the custodian, and that contract names a payee. The U.S. Supreme Court settled the question in Kennedy v. Plan Administrator for DuPont (2009), ruling that plan administrators must follow the beneficiary form on file even when a divorce decree says otherwise."

"State “automatic revocation on divorce” statutes exist. Still, they do not cover ERISA plans, and they often fail to reach IRAs held at brokerages in other states."

"When he died unexpectedly at 75, the custodian did what custodians always do: they paid the account to the name on the form. 100% went to his ex-wife of 18 years. His current spouse and adult children received nothing from the IRA."

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