Have you checked your beneficiary designations lately? Bad things can happen if they are not reviewed and updated periodically. Want proof? This week the Michigan Court of Appeals decided that Mr. Lett's employer provided life insurance should pay to his ex-wife (Ms. Henson) even though they had been divorced for 5 years when he died. The divorce judgment even terminated the couple's rights in each other's life insurance. However, Mr. Lett was also ordered to pay his ex $28,500 and was to name her as beneficiary of an insurance policy for at least that amount. Mr. Lett designated her as sole beneficiary of his $120,000 employer's group life insurance policy. Although he paid off the debt to his ex in 2012, he did not change his beneficiary designation before he died in 2014. Mr. Lett's estate objected to the ex-wife receiving the insurance proceeds, arguing, among other things, that Mr. Lett never intended his ex to receive a "$120,000 windfall" and that she had no rights in the life insurance proceeds as a result of the divorce judgment.
The three appeals judges disagreed, finding that the ex was entitled to the money as beneficiary. They relied on the facts that he made her a beneficiary after the divorce, that he did not change his beneficiary designation in the two years after he paid his obligation in full, that he was "careful" with and knowledgeable about his money, that he received annual reminders about his benefits from his employer, and that there was no evidence of fraud, severe stress or a mistake.
Some lessons from this case:
- Beneficiary designations are applied literally.
- The wrong people can inherit if beneficiaries are not updated.
- Beneficiary designations should be reviewed when significant life changes occur.
- Beneficiary designations should coordinate with an estate plan.
Beneficiary designations are commonly used with life insurance, retirement accounts, annuities, bonds, CDs, bank accounts and investment accounts. Even deeds to real estate can be prepared with a type of beneficiary designation by directing who receives the property when the owner dies. Even though commonly used, there are some advantages and disadvantages to keep in mind when designating beneficiaries.
Advantages of beneficiary designations:
- They are easy to fill out.
- They can be changed at any time by filling out new forms.
- They are inexpensive (no costs and no lawyers)
- They are usually completed at the point in time when a person opens an account, buys an insurance policy, or starts a new job.
- They are a simple estate planning tool, transferring accounts, assets and insurance proceeds to designated persons (or charities) free from probate court procedures upon the account/asset/policy owner's death.
Disadvantages of beneficiary designations:
- They are easily forgotten.
- They frequently are not reviewed or modified even though circumstances change.
- They can have a disastrous impact on certain beneficiaries.
- They may not coordinate with the broader estate plan objectives.
- They typically are prepared without legal advice.
Anyone who is an adult and has a job has probably filled out at least one beneficiary designation form. Here are some practical tips to keep in mind about beneficiary designations:
- Once every 5 years look at the beneficiary forms for every single account/asset/policy.
- Review and change beneficiaries for every birth, death, marriage, divorce, coming of age, diagnoses of disability, or significant change in health.
- Consult with an attorney before designating a minor child, someone with a disability or chronic illness, or someone with creditor, marriage or financial trouble.
- Coordinate your beneficiary designations with your overall estate plan objectives.
In addition to the above, special considerations apply to beneficiary designations of senior adults. For example, married individuals frequently name their spouse as first beneficiary. However, if that spouse requires, or is reasonably expected to require, long-term care, then the receipt of money by that spouse could interfere with their ability to qualify for public assistance such as Medicaid or VA benefits. It may be more advantageous to allow the money to pass to another person or to a testamentary trust so that the money can be available for the spouse but not be considered an asset for Medicaid/VA eligibility purposes.
This is just one example of a situation where a senior adult’s beneficiary designations require careful evaluation and planning. The elder law attorneys at Foster Swift routinely advise clients on how to best utilize beneficiary designations. In addition to routine estate planning they provide counsel on navigating the intricacies of long-term care planning and qualifying for Medicaid and other public assistance where appropriate.