A change of the beneficiary of a life-insurance policy is an area that can cause multiple legal problems. To be more specific, failing to change a beneficiary after certain events can cause problems.
Likewise, failing to change the beneficiary of retirement plans, 401Ks, IRAs, and similar assets can create problems.
A few years ago, a man lying on his deathbed signed a handwritten letter addressed to his life insurance company to change the beneficiary of his policy from his former spouse to his children. The former spouse sued and raised questions about his mental capacity and failure to use a change of beneficiary form. Much time and expense resulted in federal court before his children received their insurance funds. The man’s family could have avoided litigation had he thought earlier of changing the beneficiary. Our firm handled this case in federal court and got the funds for the children. Had he consulted our office earlier, the time and expense of litigation could possibly have been avoided.
Often people forget to change the beneficiary on their life insurance policies after a divorce. During the marriage, their spouse was the logical insurance beneficiary. Once the divorce is final, the reason to leave the spouse as the beneficiary often ends. Unfortunately, insurance companies do not recognize a divorce as an event that automatically changes the beneficiary of an insurance policy. The owner of a policy must inform the insurance company in writing of the desire to change the beneficiary. It is preferable, but not mandatory, to use insurance companies' forms. Substantial compliance with the policy provisions concerning changing a beneficiary is normally required.
On the other hand, many divorce settlements require life-insurance to be maintained in case a parent dies who is paying child support, before this obligation is completed. Preferably, the surviving spouse is to receive the insurance proceeds as trustee for the minor children. If existing life insurance policies are used for this purpose, the beneficiary change needs to be made. It is necessary that the insured spouse sign the necessary forms to name the surviving spouse as trustee for the minor children. The divorce decree should also state that the former spouse hold the proceeds as trustee for the minor children. That way, if the former spouse spends the proceeds for his or her own use, the children will have a legal remedy in the future to pursue their wasted funds.
In another case, a parent who named minor children as beneficiaries died after divorce, but had not changed beneficiaries. The insurance proceeds were therefore payable to the minor children directly. This caused two problems.
One, the funds going to the minor children had to be held under a guardianship. This is a cumbersome method to hold the children's funds that is supervised by the court, instead of a trust. A trust can be simpler and more flexible.
Two, under the guardianship, the children get all the insurance proceeds funds at age 18. But, if the trust had been set up in the divorce decree, the money could be held for the benefit of the children for a longer time. For example, the trust can provide that the children can get some of their money at age 21, and some at age 25. The parent who died should have changed the beneficiary to name the other spouse, or someone else, as trustee as soon as the divorce was final.
In some cases, our firm has helped clients petition the court to change the divorce decree itself when the trust language was omitted and the surviving parent got the insurance funds directly, which were intended for the children.
The parties would have saved a lot of time and expense in these situations if they had used a little foresight in to make sure the divorce decree was worded correctly
Another area where changing the beneficiary is important is in estate planning. Many times people create estate plans through wills or trusts, but fail to change the beneficiaries of their life insurance policies and retirement plans to match their estate plan. If these funds do not go into the will or trust, the estate plan is bypassed. Each case should be analyzed to make a decision on naming the beneficiary.
I recall a case where an elderly person wrote a will which had detailed provisions about which of her children would receive funds, whether these would be in trust, how long the trust would last, and how much each child would receive. However, she died before she changed the beneficiary of her IRA to match her will. If she had simply changed the beneficiary of her IRA to her estate, these funds would have gone into her estate and been payable through her will according to her plan. Because she did not change the beneficiary, these funds went directly to the children and her planning was for nothing.
Life-insurance can be a valuable estate planning tool to limit estate taxes. An irrevocable life-insurance trust can create a fund, which is free of estate taxes, and provide extra funds for the estate. However, careful planning of the trust does not matter if the beneficiary on the life-insurance policy is not changed to the trust. This was important in earlier years when many estates were subject to estate taxes. Now, only larger estates are subject to estate taxes. But, these laws can change any time, and the principle remains the same-change the beneficiary to match the plan.
These are all interesting stories, and each has a common element. The problem could have been avoided by following up and changing beneficiaries to match changing life situations. Everyone should keep in mind that life-insurance companies are not required to change beneficiaries because of what a will or divorce decree says. With retirement plans, the financial institution must be approached to provide a change of beneficiary document. One must follow up and submit the change form to the insurance company or financial institution to have the beneficiary changed.
Make sure for the security of your loved ones future that any life insurance, retirement or investment’s plan’s named beneficiary matches up with your wishes. Our office handles matters in these areas and would be glad to offer assistance and advice as needed.
David Sinclair Walker, Jr. P.C. P.O.BOX 871329, Stone Mountain GA 30087;
North Gwinnett Office - 6340 Sugarloaf Parkway, Suite 200, Duluth GA 30097;
South Gwinnett Office - 2330 Scenic Highway, Snellville GA 30078
Telephone 770-972-3803; Facsimile 770-921-7418 email firstname.lastname@example.org
-Admitted in GA and D.C. -UGA Law ’76 -Certified Mediator -Georgia Bar No. 731725770) 972-3803 or visit http://www.walker-law-firm.com/