Advanced Underwriting Consultants

Question of the Day – July 24

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 Texas-based client just divorced her husband.  My client has a Section 401K pension plan for which her husband was originally named the beneficiary.  I’ve heard that Texas law automatically removes the ex-spouse as beneficiary.  Is that correct?

Answer: While Texas law does automatically remove an ex-spouse as beneficiary from certain types of assets, the law probably doesn’t apply to a 401K account.

There are two Texas statutes that automatically remove a divorcing spouse as beneficiary of accounts of an ex-spouse:

  • Texas Family Code Section 9.301, which deals with life insurance policies, and
  • Texas Family Code Section 9.302, which deals with qualified plan assets.

While the second cited section of Texas law appears to disinherit an ex-spouse from a 401K plan, the U.S. Supreme Court case of Egelhoff v. Egelhoff, 532 U.S. 141 (2001) reached a different result.  The Supreme Court said that ERISA trumped Texas state law, and that the 401K account benefit would be paid to the named beneficiary—the ex-spouse.

The bottom line is that there is plenty of uncertainty about whether a named ex-spouse beneficiary will or won’t receive account proceeds in the event of a former spouse’s death.  As financial professionals, we should keep in touch with our clients who are going through a divorce, and make sure their beneficiary designations are up to date.

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.