Life-changing events such as marriage, divorce, and death require a review of the beneficiary designations for life insurance policies and retirement accounts. These types of assets often represent a significant portion of clients’ net worth, but all too often, the update of beneficiary designations is overlooked. A recent Michigan case, In re Lett Estate, 887 N.W. 2d 807 (2016), highlights the importance of updating your beneficiary designations as soon as possible after a life-changing event, such as a divorce.
John Lett named his former spouse, Nancy Henson, as his beneficiary of a life insurance policy he had through his employer. After their divorce, John removed Nancy as a beneficiary of his employer-provided benefits. As part of their divorce, John and Nancy waived their respective rights to any life insurance proceeds on each other’s life. A year later, as part of the divorce judgment to cover his share of a debt payable to Nancy, John named Nancy as the sole beneficiary of his employer’s group life insurance policy. John paid off his debt; however, he did not change the beneficiary designations on his life insurance policy before he died two years later. After John’s passing, his personal representative sought payment of the proceeds from John’s life insurance policy to be paid to John’s estate. The Michigan Court found that the life insurance proceeds were payable to Nancy, as the sole designated beneficiary, since: (i) the waiver under the divorce judgment did not apply to beneficiary designations put in place after their divorce; and (ii) nothing under Michigan law revoked the post-divorce beneficiary designation that John signed after the divorce was finalized.
Some state laws prevent former spouses from claiming shares from a decedent’s estate or trust and some state laws revoke beneficiary designations upon divorce. These laws vary greatly from state to state. [1] As the In re Lett Estate case reflects, it is important to consult with your estate planning advisor to understand how state laws may affect the distribution of the proceeds and/or benefits of any of your life insurance policies and/or retirement plans and to ensure that your beneficiary designations are reviewed and updated often.
[1] The In re Lett Estate case involved Michigan law which provides that if a judgment of divorce does not determine the rights of the former spouse in and to a policy of life insurance, the policy shall be payable to the estate of the insured. M.C.L.A. § 552.101(2). Utah law provides that a divorce revokes a beneficiary designation in a life insurance policy unless the express terms of the “governing instrument, court order, or contract relating to the division of the marital estate” suggest otherwise. Utah Code § 75-2-804(2). In D.C., a divorce does not automatically divest the former spouse’s interest as the designated beneficiary unless a divorce decree specifically intends otherwise. See Mayberry v. Kathan, 98 U.S. App. D.C. 54 (1955). In Maryland, unless the divorce decree specifically revokes the right to inherit life insurance, a divorce does not automatically waive the former spouse’s right to claim the benefits if the designation is not changed. See Cassiday v. Cassiday,259 A.2d 299 (1969). In contrast under Virginia law, a divorce does revoke a former spouse’s right to inherit in any life insurance proceeds of the decedent. Va. Code Ann. § 20-111.1. Likewise, New York state law provides that, unless the divorce decree clearly states otherwise, a divorce automatically revokes a beneficiary designation to a spouse. E.P.T.L. 5-1.4(a)(1). And in Florida, a divorce voids a beneficiary designation of a former spouse if the designation was made prior to the dissolution of marriage or court order. F.S. § 732.703(2).