When a divorce is complete, many people do not change the beneficiaries on their life insurance policies or their retirement benefits. Some people just assume that their ex-spouse cannot inherit their property, and others do not think about it at all. After all, Sections 9.301 and 9.302 of the Texas Family Code deal with this situation. However, if those statutes are not read closely enough, not changing your beneficiary can be disastrous.

Section 9.301 (a) of the Texas Family Code says that, upon divorce, any pre-divorce designation of a former spouse as a beneficiary is not effective unless the decree designates the former spouse as a beneficiary, the insured person redesignates the former spouse after the divorce, or the former spouse is designated to receive the proceeds in trust on behalf of minor children or dependent of either spouse.

Section 9.302 (a) has the same language in relation to retirement benefits, including IRAs, employee stock option plan, stock option, or other form of savings, bonus, profit-sharing, or other employer plan or financial plan of an employee or a participant in force at the time a divorce decree is rendered. If a former spouse has been designated as the beneficiary on the retirement benefits listed above at the time the divorce is rendered, the designation is not effective unless the decree designates the former spouse as a beneficiary, the designating former spouse redesignates the former spouse after the divorce, or the former spouse is designated to receive the proceeds in trust on behalf of minor children or dependent of either spouse.

Here is an example of how this works:

Husband and Wife divorce. Husband receives his life insurance policy and IRA in the divorce, both of which have previously listed Wife as the beneficiary and Child as the alternate beneficiary. Husband wants Child to be the beneficiary. Unless the Decree states that Wife remains the beneficiary or Husband redesignates her as the beneficiary, Wife’s previous designation as the primary beneficiary is ineffective (except she may receive the funds in trust on behalf of the child), and benefits would be payable upon death to Child under 9.301(b) and 9.302(b).

Based on these two statutes, it seems it would not be necessary for Husband to change his beneficiaries after divorce. However, 9.301(c) and 9.302(c), you will probably change your mind. These statutes limit the liability of insurers and business entities, employers, financial institution or other persons obligated to pay retirements. If one of those entities pays life insurance proceeds or retirement benefits to a former spouse that would be ineffective under 9.301(a) or 9.302(a), the entity will only be liable to pay the benefits to the correct beneficiary if the entity receives written notice from an interested person prior to the payment that the designation is not effective and the entity does not interplead the benefits into the registry of the Court.

Let’s go back to the earlier example:

After Husband dies, an interested person (presumably Child or the executor of Husband’s estate) would be required to send written notice to the insurance company or financial institution that the designation of Wife as the beneficiary is ineffective. If this does not happen and the insurance company or financial institution pays the benefits to Wife, the entity would not be liable to Child.

In that situation, the result is that Wife ends up with the life insurance proceeds and retirement benefits, and it could have been prevented. Instead of relying on the designation being ineffective, it is a better idea to change your beneficiary immediately after the divorce. That way, you will have the peace of mind to know that your property will end up in the right hands.

If you have more questions about protecting your assets after divorce, contact Gregory S. Beane at VernerBrumley. He can be reached by phone at 214-526-5234 or by email at [email protected]. VernerBrumleyMcCurley’s principal office is located in Dallas, Texas.