Although many people might secretly wish their exes were dead during a bitter divorce, the reality when it actually happens is almost always horrible -- no matter how acrimonious (or amicable) the divorce. I've seen it happen during every step along the divorce path: during the divorce, immediately after the divorce, many years after the divorce. I've seen it happen to people with no children, small children, and grown children. Each situation presents different challenges, but all can be excruciating.
Dealing with the death of a former (or not-quite former) spouse can be emotionally and financially devastating in countless ways. Here, though, I want to focus on one particular aspect: retirement. Handling the surviving spouse benefits of retirement plans is one of the most complicated issues to sort out in a divorce. Take my word for it: this can be a mind-bogglingly complex area of the law. But, there are a few important issues to be aware of and steps to take that can protect most people from the worst consequences of the unexpected death of a former spouse.
First, it is important to make a distinction between the types of retirement plans that might be divided in a divorce. The two most common are 401(k)-type plans and traditional pension plans (the kind that send monthly checks to an employee after retirement, usually for the rest of his or her life). To divide either of these two kinds of retirement plans as part of a divorce, you need something called a Qualified Domestic Relations Order ("QDRO"). The QDRO is what will allow a retirement plan to send benefits to someone (usually a former spouse) who is not the employee. In most divorce cases, the QDRO is not finished until sometime after the divorce is over - usually a few months, but in some cases, many years after the divorce. Delays in getting the QDRO finished can create catastrophic consequences if one of the spouses happens to die before it is complete.
If a 401(k) or similar plan is to be divided in your divorce, make sure that the divorce decree or Settlement Agreement makes it clear that the spouse who is to receive funds from the other spouse's 401(k) is supposed to get them no matter when the employee spouse dies. Then, even if the employee spouse dies the day after the divorce is final, and before the QDRO is entered, in most cases, the former spouse can still get the portion of the 401(k) that he or she was awarded in the divorce.
Some divorce agreements specify that the employee must maintain the other spouse as the beneficiary of the 401(k) until the QDRO is complete. Most people (including many attorneys) do not realize that if the person designated as the beneficiary on file with the employer is different from what the divorce decree says, the form on file with the employer - not the court order in the divorce - is what will control. Some of these cases are heartbreaking - families mourning a death find themselves battling with a former spouse in court over who is supposed to receive the 401(k). If you have a 401(k), make sure your beneficiary designations are updated after your divorce. If you are supposed to receive funds from your former spouse's 401(k) in your divorce, make sure that it is clear what is supposed to happen if he or she dies before the whole process is finished.
While surviving spouse issues can be tricky with 401(k) plans, they can be stratospherically complicated with pension plans. In many cases, the benefits are not payable at the time of the divorce - so you are talking about dividing benefits many years down the road, when the employee is eligible to retire. If the employee dies before retirement, in many cases the former spouse will get nothing from the retirement plan - even if the couple specifically agreed that the former spouse was supposed to get half the benefits! This is because surviving spouse benefits need to be carefully spelled out in both the divorce decree and the QDRO - but they rarely are. In many cases, the surviving spouse will get only half of what the parties intended, simply because the wrong language was used in the QDRO, and no one understood this when the document was prepared.
When it comes to retirement benefits, there are rarely any second chances. Once someone dies or retires, it is usually impossible to fix any errors. If the employee remarries before dying, things get even trickier. Most pension plans automatically pay a surviving spouse benefit to the current spouse at the time of the employee's death. It is not uncommon for the death benefit to be paid to the new spouse - even if the former spouse was specifically awarded the benefits under the divorce decree. This can happen if the surviving spouse benefits are not properly handled in the divorce document and the QDRO.
Each case and retirement plan is different, and there are way too many possibilities to cover them adequately here. The simplest, best things you can do to protect yourself and your family from a horrible post-death ordeal are to be certain that:
- Your divorce documents spell out what happens if the employee dies before the funds can be transferred from a 401(k);
- Your divorce documents spell out what happens to the pension plan benefits if the employee dies before AND after retirement (these are two separate issues, with different rules and consequences - lots of divorce lawyers do not realize this);
- The QDRO gets done quickly and accurately;
- The QDRO is sent to the Plan Administrator (not just the judge!) and formally approved in writing.
I can't overstate how devastating these situations can be when this is not handled properly. There are no do-overs with this stuff -- it has to be right the first time.