A marital agreement can take the form of a premarital agreement, a postmarital agreement, or a separation agreement, i.e., an agreement that settles property rights (and other issues) between parties who intend to divorce. A marital agreement may provide for the disposition of assets at death; it may require one or both parties to provide for the other or a child at death after divorce; or it may waive rights at death. When the terms of a marital agreement and a beneficiary designation conflict with each other, the law will either validate or annul the designation, depending on the jurisdiction, the type of asset, and the language of the marital agreement.
The District of Columbia, Virginia, and Maryland all have laws that revoke at divorce either the entire will or the portions benefitting a now-former spouse, but the laws in these jurisdictions do not provide the same rules for beneficiary designations. The choreography between beneficiary designations, divorce, and marital agreements is unique and does not squarely align with laws governing divorce and will revocation.
A conflict can occur when a marital agreement provides for a waiver of claims to the other spouse’s assets at divorce, yet a pre-existing beneficiary designation nominates the former spouse as beneficiary of the asset at death. A general waiver of rights to an equitable distribution of property at divorce—such as the right to share the value of an IRA or the cash value of a life insurance policy—will not ordinarily defeat a beneficiary designation naming the other spouse. For example, many marital settlement agreements waive each party’s rights and interests in the other spouse’s retirement assets. However, when a spouse has named the other as beneficiary of an IRA and the IRA owner does not change the beneficiary, a waiver in a marital agreement of property rights, even a waiver that specifically mentions retirement assets, may not be sufficient to overcome the otherwise valid beneficiary designation.
Maryland and District of Columbia courts have consistently held that a general waiver of property rights in a marital agreement will not nullify a beneficiary designation, nor will a divorce judgment nullify the beneficiary designation. These courts recognize the distinction between a waiver of the automatic right to share in the estate of a deceased spouse (while the parties are still married) and the right to benefits under a beneficiary designation. The owner of the asset has the right to change the beneficiary at any time, the spouse only had an expectancy, not a legal right; a waiver of rights is not a waiver of an expectancy.
A marital agreement must contain an express waiver of an expectancy, if that is what the parties intend, such as a statement that each party expressly waives any rights under a previously-executed beneficiary designation. Parties entering into a premarital agreement may wish to include express-waiver language as to a retirement account that provides for benefits to go to a spouse by default; a Maryland court held that a premarital agreement divested a former spouse of benefits under such a beneficiary designation.
On the other hand, a marital agreement may provide for a surviving spouse or former spouse to receive certain benefits at the other party’s death, such as life insurance or an IRA. If the spouse obligated to provide benefits fails to do so, the survivor’s remedy may be to seek a court ruling that the surviving spouse or former spouse is the true beneficiary, or that requires the named beneficiary to pay over the asset to the rightful owner.
The Virginia Legislature has made some effort to address the problem of the beneficiary designation naming a former spouse who is no longer the intended recipient. Virginia Code §20-111.1 provides that any revocable beneficiary designation for death benefits payable to a former spouse in a prior-existing written contract is automatically revoked at divorce. Benefits will be paid as if the former spouse predeceased the decedent, but only if the payor (the insurance company or other financial institution) receives written notice of revocation by divorce of the beneficiary designation before it distributes the death benefits to the named beneficiary. This provision does not apply if the parties’ settlement agreement provides for another disposition of assets at death, such as for life insurance to be payable to a former spouse. The provision also does not apply to benefits payable to a trust nor to death benefits payable to or under a trust. This law only applies to divorces that occurred on or after July 1, 1993; any beneficiary designation executed before that date is not automatically revoked.
The Virginia statute does not revoke a beneficiary designation under an employer-sponsored life insurance policy as the right to these benefits is governed by a federal statute. It also does not apply to benefits under the Federal Employees’ Group Life Insurance program. These, too, are governed by federal law. In both cases, federal law preempts state law, meaning federal law, not state law, controls. Virginia, in 2012, began requiring divorce decrees to include a notice to the parties that beneficiary designations may not be automatically revoked and that parties should follow provider instructions regarding beneficiary changes.
It is best practice to update one’s estate planning documents or, at least have them reviewed, after a marital separation, and to make appropriate changes to beneficiary designations after execution of a marital agreement and, sometimes, again, after a divorce. Failing to do so may not only produce unintended consequences, but could also result in a costly and bitter dispute amongst family members.