Revocation on Divorce Statute: Does it Cover Inherited IRAs?

Take-Away: Like one-half of the states, Michigan includes as part of its Estates and Protected Individual’s Code (EPIC) a revocation-on-divorce statute. That statute extends not only to a former spouse, but to the relatives of that former spouse. Some assets, however, are not subject to that statute.

Background: As of 2018, 26 states had adopted a revocation-on-divorce statute. The effect of a revocation-on-divorce statute is to automatically remove an ex-spouse as a named beneficiary on the deceased former spouse’s death under a Will, Trust, or other common beneficiary designation arrangements.

Revised Probate Code: Michigan’s former Revised Probate Code’s revocation-on-divorce version only extended to a provision made for a spouse under a former spouse’s Will, or naming that former spouse as personal representative of the decedent’s probate estate. In short, it had no impact on a decedent’s revocable grantor trust.

EPIC Expansion: When EPIC was adopted in 2000, it increased the scope of Michigan’s revocation-on-divorce statute. MCL 700.2807 expanded the revocation-on-divorce to cover all governing instruments as defined in EPIC. MCL 700.1104(m), in turn, uses an expansive definition of governing instrument to include deeds, Wills, Trusts, a funeral representative designation, life insurance and annuity policies, POD accounts, TOD accounts, pensions, profit sharing, or ‘similar benefit plans.’

Divorce Statutes: Prior to EPIC many of Michigan’s divorce statutes were relied upon to prevent a former spouse from claiming benefits from their deceased former spouse’s estate when the decedent forgot to change his or her life insurance, pension, annuity and retirement benefit beneficiary designation, leaving their former spouse named as the surviving beneficiary. [MCL 552.101(1).]

POD and TOD: However, other modern financial disposition arrangements, e.g. TOD and POD beneficiary designations,  were not covered by those divorce statutes. Accordingly, there was the perceived need to use a more expansive revocation-on-divorce statute that covered all governing instruments. [MCL 700.2807.]

Michigan Revocation-on-Divorce Statute: In general, Michigan’s statute [MCL 700.2807(1)(a)(i)] revokes a disposition or appointment of property made by a divorced individual to his or her former spouse in a governing instrument, or an appointment created by law or in a governing instrument to a relative to the divorce individual’s former spouse or to a relative of the divorce individual’s former spouse. The automatic revocation also extends to when a governing instrument confers a power of appointment on a divorced individual’s former spouse or the former spouse’s relative. [MCL 700.2807(1)(a)(ii).]

Governing Instrument: EPIC uses a ‘definition within a definition’ when it comes to its revocation-on-divorce statute. MCL 700.2806(d) provides: “Governing instrument” means a ‘governing instrument’ executed by a divorced individual before the divorce from, or annulment of his or her marriage to, his or her former spouse.

Constitutionality of Statute: In 2018, the United States Supreme Court in Sveen v Melin found Minnesota’s revocation-on-divorce statute (very similar to Michigan’s) to be constitutional. In that case Mark purchased a life insurance policy on his life, and he named his wife Kaye as the primary beneficiary and his two children from a prior marriage as the contingent life insurance beneficiaries. Mark and Kaye divorced. Mark, however, failed to change the beneficiary designation of the life insurance policy on his life. Kaye remained as the named primary beneficiary when Mark died. The Supreme Court found Minnesota’s revocation-on-divorce statute to be constitutional, and therefore Mark’s two children from his prior marriage received all of the death benefit, not Kaye though she was named as the sole life insurance beneficiary.

Qualified Plan Exception: One major exception to the enforcement of a state’s revocation-on-divorce statute is with regard to qualified retirement plans. When it comes to a qualified pension plan or a 401(k) account, which are governed by the Employee Retiree Income Security Act [ERISA], ERISA includes a preemption clause that “ERISA supersedes any state law that relates to company retirement plans.” This preemption provision has been interpreted very broadly by the Supreme Court. In Egelhoff v Egelhoff (2001) David named his wife Donna, both Washington state residents, as beneficiary under his Boeing pension plan that was covered by ERISA. David and Donna divorced. David failed to change the beneficiary designation on his Boeing pension. David died. The Supreme Court found that Washington’s revocation-on-divorce law was superseded because it clearly “relates to ERISA retirement plans.” Accordingly, Donna received all of David’s pension plan death benefit despite their divorce and Donna’s waiver of many assets expressly awarded to David in their divorce.

What About IRAs?:  A couple of days after the Supreme Court’s decision in Sveen, it had the occasion to address a lower federal court’s decision that found that Arizona’s revocation-on-divorce statute could be applied to remove a former spouse as the named IRA beneficiary after a divorce when the IRA owner former spouse died. The principal reason was that IRAs are not covered by ERISA. Consequently, ERISA’s broad preemption provision does not apply to a situation where an IRA owner dies and has failed to change the beneficiary designation to remove his/her former spouse as the primary beneficiary.

Lingering Question: Does Michigan’s revocation-on-divorce statute extend to the designation of a former spouse on an inherited IRA?

Sveen would seem to say ‘yes.’ But…..

EPIC defines governing instrument, to expressly cover “insurance and annuities, TOD designations, POD designations, and pension, profit sharing, or similar benefit plan…” An inherited IRA is neither life insurance or an annuity, nor is it  a TOD or POD arrangement.

Nor is an inherited IRA considered, according to the U.S. Supreme Court, a retirement plan, at least as it pertains to protecting the inherited IRA in the beneficiary’s subsequent bankruptcy proceeding. Clark v. Rameker, (2014). 

As such, there could be a question whether an individual who inherits an IRA and then names their spouse as successor beneficiary of the inherited IRA, and who later dies without changing that beneficiary designation, is actually covered by Michigan’s revocation-on-divorce statute.

Amend Statute?: An inherited IRA is not expressly mentioned in Michigan’s revocation-on-divorce statute. Arguably, it is not a ‘similar benefit plan’ when that vague category is identified directly after ‘pension, profit sharing, retirement…or similar benefit plan’ [clearly intended to cover retirement accounts].

Thus,  there could be some question if a former spouse is named as a successor beneficiary of an inherited IRA, and the inheritor dies prior to the complete distribution of the inherited IRA without removing their former spouse as successor beneficiary. Does the statute apply in this narrow situation? Someone who inherits an IRA and plans to wait for the full 10 years before taking one lump sum distribution, might be at extreme risk if they name their ‘current’ spouse as the successor beneficiary.

Consider an inherited Roth IRA that is permitted to grow by its inheritor the full SECURE Act’s 10-year period, who dies prior to withdrawing any  of the inherited Roth IRA but fails to remove their former spouse as its successor beneficiary.

It makes sense for Michigan to amend its revocation-on-divorce statute to include “inherited IRA account designation” along with all of the other identified assets of the decedent where the designation of a former spouse as successor beneficiary is automatically removed.

Conclusion: Of course, the solution to this entire problem is for an individual who divorces to promptly take action to change their beneficiary designations to remove their former spouse as their designated beneficiary. That said, we have at least 26 states that have resorted to adopting  revocation-on-divorce statutes because they understand that despite the need to be vigilant, former spouses often fail to change their beneficiary designations, even after a long, and bitter, divorce. Looking at the amount that will be inherited by beneficiaries with tradition  and Roth IRAs in the coming years, it makes sense to update Michigan’s revocation-on-divorce statute to include inherited IRAs.