Estate Planning After Divorce: Revisit Your Beneficiary Designations or Your Estate Could Pay the Consequences

Many people direct the disposition of their bank accounts, investments, retirement accounts and life insurance upon their death by designating beneficiaries of those assets. When an asset passes by beneficiary designation, otherwise called a pay-on-death provision, it becomes a non-probate asset and therefore passes outside of a person’s probate estate.

In New Jersey, New York, and Pennsylvania, among other states, a divorce automatically revokes any provisions in a will which benefit a former spouse, unless the will expressly states otherwise. Similarly, New Jersey statute 3B:3-14 provides that a divorce revokes any revocable appointment directing the disposition of property – such as a beneficiary designation – to a former spouse unless the governing instrument, court order, or divorce agreement dividing marital assets expressly states otherwise.

This year, the New Jersey Supreme Court considered whether a decedent’s pay-on-death provision on his U.S. savings bonds survived his divorce and satisfied the terms of his divorce settlement agreement (“DSA”). The decedent, Michael Jones (“Michael”), bought Series EE U.S. savings bonds while married to Jeanine Jones (“Jeanine”) and named her as the pay-on-death beneficiary of the bonds. When Michael and Jeanine divorced in 2018, the DSA required Michael to pay Jeanine $200,000 over time and also stated that any marital asset not specifically listed in the DSA “belong[ed] to the party who ha[d] it currently in their possession.” The DSA did not explicitly mention the savings bonds.

Michael died in 2019 and, at that time, had only paid Jeanine $110,000 of the required $200,000. When he died, Jeanine redeemed the savings bonds for approximately $77,800. Michael’s daughter, acting as administrator of his estate, asserted that the value of the savings bonds should go towards the $90,000 Michael still owed Jeanine when he died.

The New Jersey Supreme Court held that the bonds’ pay-on-death designations were “governing instruments” and relevant federal rules prevented their automatic revocation of a pay-on-death provision following a divorce. The Court further held that NJSA 3B:3-14 incorporated and followed those federal regulations and, going one step further, held that the terms of the DSA required that the bonds passed to Jeanine as their sole owner after Michael’s death. The Estate was therefore responsible for paying Jeanine the money Michael still owed her under the DSA when he died. Under the Court’s interpretation of the statute and the DSA, Jeanine got to have her cake and eat it, too.

This case illustrates the complexities and undesired outcomes that can arise if you do not periodically revisit your estate plan, including all of your pay-on-death provisions. Our knowledgeable and capable estate planning attorneys can assist in ensuring your assets pass exactly as you intend.