No one wants to plan for death or a divorce but a lack of planning can create a number of unfortunate outcomes. Before getting married, a prenuptial agreement can be beneficial in that the individual parties can pre-decide how they will divide assets in the event of a divorce. Wills are another type of legal instrument that dictates where a person's assets go at his or her death.
Both prenuptial agreements and wills can give Minnesotans some peace of mind as to the allocation of assets and to protect assets but unfortunately these documents have some shortfalls if a party does not take the right steps during a divorce. Certain assets, such as retirement accounts, go to the person named in the beneficiary designation, possibly an ex-spouse, even if the marriage has ended. Beneficiary provisions essentially trump everything else, including a will.
It would be troubling for many people to imagine their entire 401k or IRA going to an ex-spouse when they die. For many Americans, retirement accounts like these make up a large amount of their liquid assets but they may not think to remove a former spouse as the beneficiary after a divorce.
Similar issues surround prenuptial agreements. Spouses may come to an agreement on who gets what in the event of a divorce but 401k plans require the payout to go to the plan-holder's spouse. A spouse can relinquish this automatic payout right but only through additional paperwork. A prenup that relinquishes rights to a 401k will not be sufficient.
As couples draft prenuptial agreements, beneficiary designations should also be addressed at the same time. If there is any concern with naming a spouse as beneficiary, then it is important to get the proper relinquishment of rights. The same considerations should be made following a divorce. After the divorce proceedings are all said and done, each party may want to talk to an attorney about tying up any more lose ends, like updating retirement account designations, hopefully preventing any unpleasant outcomes in the future.
Source: ABC News, "How you ex-spouse could inherit most of your money," Laura Mattia, May 23, 2014