The great majority of divorcing couples in New Jersey resolve their issues in the form of a Marital Settlement Agreement (a.k.a. Property Settlement Agreement). In addition to a division of marital assets, such Agreements may include a waiver of certain assets, such as life insurance or retirement benefits. Although New Jersey, as well as many other states, has enacted legislation voiding the rights of a former spouse named in a will, potential problems exist with regard to non-probate assets which contain death beneficiary provisions such as life insurance, 401 (k) plans and Individual Retirement Accounts.
For example, in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 U.S. 285 (2009), the United States Supreme Court held that as a matter of federal law (commonly known as ERISA which governs qualified retirement plans), the plan benefits had to be paid to the designated beneficiary, in this case the former wife. regardless of whether she had waived her rights to same in the parties’ Marital Settlement Agreement [the ruling did not, however, preclude the possibility of the estate or beneficiaries of the estate suing the decedent’s former spouse as the Court remained silent on the issue]; see also Estate of Kensinger v. URL Pharma, 674, F.3d 131 (3d Cir. 2012), which addressed the issue left silent in Kennedy by ruling that once the proceeds were paid to the former spouse the estate could bring suit to recover the benefits.
In the case of life insurance, the Kennedy decision would not be binding, however, since New Jersey law specifically provides that a former spouse is divested of beneficiary status following a divorce.
With respect to traditional and Roth IRA’s, the outcome remains uncertain. Although IRAs are retirement accounts, they are not governed by ERISA. Should the IRA custodian, like a 401(k) plan administrator, be able to rely on a beneficiary designation naming a former spouse and pay pursuant thereto regardless of whether the former spouse waived the right to payment in a Marital Settlement Agreement? Can a contingent beneficiary demand payment from the IRA custodian based upon such a waiver? Can the contingent beneficiary recover the proceeds paid to a former spouse by the IRA custodian? Suffice it to say that no definitive answers exist since no court has yet ruled on such matters.
One potential solution is to change all beneficiary designations naming a former spouse upon divorce. In this regard, persons are advised to consult with knowledgeable counsel before determining how to proceed.