Advanced Underwriting Consultants

Ask the Experts – March 24, 2015

Question: Does a divorce nullify my client’s ex-spouse as a life insurance beneficiary?

Answer: It depends on the relevant state’s laws.

Several states have enacted legislation that works to effectively nullify an ex-spouse as a primary beneficiary for an insurance policy. One of these states is the State of Florida. In 2012 the state passed F.S. 732.703 which voids the designation of a former spouse as a beneficiary of an interest in an asset that will be transferred or paid upon the death of the decedent if:

  • The decedent’s marriage was judicially dissolved or declared invalid before the decedent’s death and
  • The designation was made before the dissolution or order invalidating the marriage.

If this law applies the asset will pass as if the former spouse predeceased the decedent. This can create a number of consequences. If there is a contingent beneficiary named then the asset will go to the contingent beneficiary. If there is no contingent beneficiary, the asset will likely end up as part of the decedent’s probate estate.  Probate assets are subject to the probate process, and therefore become potentially accessible by the decedent’s creditors. The probate process also tends to be long and drawn out, which delays the beneficiary’s ability to access the asset as well.  Your client may want the ex-spouse to remain the beneficiary despite the divorce. These laws would frustrate that desire. An individual could affirm the beneficiary designation after divorce in order to name that ex-spouse as beneficiary.

For these reasons it is important for financial professionals to stay in contact with clients and remain up to date on their life situations. A check on clients’ current life circumstances might save a lot of headaches later as well as present the opportunity to address clients’ changing needs.

Ask the Experts – August 11, 2014

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.

Question: My client participates in a defined benefit plan that provides a joint and survivor annuity after retirement. If my client and his wife divorce, what happens to the potential spousal benefit?

Answer: If divorce occurs before the annuity payments begin, the qualified joint survivor annuity is usually cancelled, but it’s best to check with the plan administrator. That doesn’t mean the ex-wife will get nothing though. She may still be able to get a qualified domestic relations order (QDRO) that allows her to access a portion of the plan.

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Ask the Experts – February 28

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: My client, age 45, received half of each of her ex-husband’s IRA and 401(k) accounts pursuant to a divorce settlement. If she withdraws all the funds from both accounts, will she incur the 10-percent penalty on the proceeds?

Answer: The rules are different based on the type of plan.

The proceeds from the 401(k) account will not be subject to the 10-percent penalty as long as the plan was split pursuant to a qualified domestic relations order (QDRO). The distributions will still generally be subject to ordinary income taxes—just not the penalty.

On the other hand, a distribution from the IRA will be subject to the 10-percent penalty unless another exception applies (e.g., disability, SEPP plan, medical expenses) since QDROs don’t apply to IRAs.[1] However, like the 401(k), an IRA distribution will still generally be subject to ordinary income tax treatment.

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[1] See I.R.C. §§ 414(p)(9), 401(a)(13), 408.

Ask the Experts – February 21

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: If an IRA owner dies after she divorces her ex-husband, and she failed to remove him as the designated beneficiary, would he still be entitled to the IRA proceeds?

Answer: It depends on the facts and the state’s laws, so it’s best to contact a local attorney.

Some states automatically invalidate an ex-spouse’s designation as beneficiary following a divorce, but this is not always the case. For example, consider the recent case in New Hampshire, UBS Financial Services v. Brescia, 2014 WL 580142 (2/12/14).

In UBS Financial, an IRA owner and her husband divorced. They signed a divorce decree which released all claims of one party to the property of the other; however, the ex-wife left her husband as the named beneficiary to her IRAs.

The ex-wife died six years later without amending the designated beneficiary. At her death, both her estate and her ex-husband asserted a right to the IRA proceeds. The district court of New Hampshire held that the ex-spouse, as designated beneficiary, was entitled to the IRA.

The court reasoned that the divorce decree must unambiguously show an intent to remove a beneficiary in order to change the original designation. The ex-wife’s estate argued that by signing the property release agreement upon their divorce, the ex-husband was removed as beneficiary. The court disagreed, reasoning that the property release agreement did not affect the beneficiary status because the beneficiary status was not a vested property right.

The estate also argued that the property release showed an intent to remove her ex-husband as beneficiary to the IRA. The court was not convinced, holding that under state law, the owner must make an effort to change the beneficiary designation.

The ruling may seem unfair, but the court noted that the purpose of this rule is to avoid speculating about what the parties may have intended. Furthermore, the ex-wife could have avoided this result by simply changing the designated beneficiary.

In some states, ex-spouses are automatically removed as beneficiaries. But regardless of the state in which an individual resides, she should always make sure her designated beneficiary lines up with her intentions. This is much safer and easier than relying on state-specific rules.

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Question of the Day – July 31

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client has a child support judgment against her ex-spouse.  Can she force him to transfer part of his 401K account to her in satisfaction of the judgment?

Answer: Probably not.

In general, Section 401K accounts are protected by ERISA rules against alienation, and are protected from bankruptcy claims by federal law.  That means that is someone sues a 401K plan participant, the creditor can’t get at the 401K account balance through the court process.  Similarly, if a 401K account owner declares bankruptcy, the 401K account balance is not considered to be an asset that is available to the owner’s creditors.

If the spouse owing back child support voluntarily withdraws money from the 401K account, then it is available to satisfy the judgment.

A spouse who is worried about her prospective ex-husband’s ability to satisfy child support obligations may be able to negotiate a transfer of assets in the other spouse’s 401K plan at the time of divorce.  However, if the spouse with 401K plan assets is not entitled to a distribution from the account, the fact that the parties are divorcing will not enhance the ability to access those account balances by either party.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – May 3

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: I have worked with a married couple on their financial planning and insurance for years.  They are getting divorced, and I expect the process will be unfriendly.  How should I plan to deal with the ethical issues I might face?

Answer: While there is no universal answer, most are best served by being clear, open and honest in their communications with divorcing clients (and their attorneys).  Here’s one message that a financial professional might pass along to long-time clients divorcing after a 20 year marriage:

I understand that the two of you are going through a divorce.  During the process, either of you (or your attorneys) may need to get financial information or records from me.  Because the two of you have shared all your financial information openly with me during our relationship, I will continue to work from the perspective that there are no secrets between the two of you.  When I get a request for information from one of you, I will share the information with both parties and your attorneys.

If this is not acceptable, I need to get specific information about an alternative method of sharing information signed by either

1. both of you, or

2. the divorce court judge.

I will also inform all parties of any requests made to me to access money from any accounts which I administer for you.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.