While most couples involved in a divorce give a great deal of thought to the terms of the divorce in their Marital Settlement Agreement, less attention may be paid to how the dissolution of the marriage affects joint ownership of real and personal property and the right to inherit by beneficiary designation.
The Virginia Code addresses what happens to joint ownership of real and personal property. In Va. Code §20-111, the law provides that “Upon the entry of a decree of divorce from the bond of matrimony, all contingent rights of either consort in the real and personal property of the other then existing, or thereafter acquired, including the right of survivorship in real or personal property title to which is vested in the parties as joint tenants or as tenants by the entirety, with survivorship as at common law, shall be extinguished, and such estate by the entirety shall thereupon be converted into a tenancy in common.”
In many divorces, jointly owned real estate will be sold, severing the former “tenants by the entirety” ownership unique to married couples. In some cases, however, the sale does not take place at the time of the divorce or shortly thereafter. The now ex-spouses continue to own the property together. The form of ownership becomes important in determining what rights each ex-spouse has with regard to the property. Before the divorce, each spouse had the “right of survivorship” and would become sole owner at the death of the first spouse. Even further, as “tenants by the entirety”, creditors could not force the sale of the home to satisfy the debts incurred by only one spouse. Ownership as tenants in common means each co-tenant is free to transfer this interest during life or at death. Each tenant can sever his or her relationship with the other tenant by conveying the interest in the property to third party, who then becomes a tenant in common with the former spouse. Lifetime transfers can include a sale to a third party or transferring to a revocable trust. Transfer at death can be by will, with a Transfer on Death Deed or under the state laws covering who inherits when there is no will (intestacy).
Another tricky area is beneficiary designations on retirement accounts, life insurance, annuities, and Transfer on Death and Pay on Death beneficiary designations on investment and bank accounts
As with ownership of real and personal property, the Virginia Code covers what happens to a beneficiary designation naming an ex-spouse as beneficiary. VA Code §20-111.1(A) provides that upon entry of a decree of divorce “any revocable beneficiary designation that provides for the payment of any death benefit to the other party is revoked. A death benefit prevented from passing to a former spouse by this section shall be as if the former spouse had predeceased the decedent.” The law specifically covers life insurance, annuities, retirement accounts, compensation agreements or other contracts that pay out as the result of death.
However, (and it’s a big however), qualified retirement plans such as 401(k), 403(b), 457 and the federal Thrift Savings Plan are governed by the Employee Retirement Income Security Act (ERISA) of 1974. Federal law preempts state law in when ERISA plans are involved. The US Supreme Court has heard many cases in which a deceased spouse did not change the beneficiary designation on an ERISA plan, and an ex-spouse inherited the retirement plan rather than the current spouse. Egelhoff v. Egelhoff (2001) covered an employer-provided life insurance and retirement plan that the decedent’s children sued to retrieve from an ex-spouse. The ex-spouse won. Hillman v. Maretta (2013) concerned a divorced and remarried federal employee who forgot to change the beneficiary on his Federal Government Life Insurance (FEGLI) policy. His new wife sued to get the life insurance. The ex-spouse won.
The upshot is that finalizing a divorce may involve important aspects of estate planning that also need to be finalized.