Beneficiary Designations Gone Wrong

I don’t have an ex-wife, but if I had one, I’m pretty sure I wouldn’t want her to get my life insurance when I die.

And I doubt William Kennedy wanted his ex-wife, whom he divorced almost 20 years prior to his death, to get his life insurance policy of $400,000, but she did. This was despite the fact William had changed the beneficiary of his pension plan to his daughter, Kari, and had named her as the beneficiary of his will.

Perhaps Kari could commiserate with Bruce Friedman, who thought he would be the beneficiary of his wife’s pension after she passed away suddenly from a massive heart attack. Bruce and Anne were happily married for 20 years, but when it came time to distribute Anne’s almost $1.0 million pension benefit, the money went to Anne’s sister based on a beneficiary designation filed by Anne four years before she met Bruce.

Apparently Warren Hillman didn’t hear about Kari Kennedy’s or Bruce Friedman’s problems, or, if he did, he definitely didn’t learn from them. Warren divorced Judy in 1996. Prior to his divorce, he named Judy as the beneficiary of his life insurance worth almost $125,000. He later married Jacqueline, but never changed the beneficiary of his life insurance policy. When Warren died, Judy thought she should be the beneficiary despite being divorced from Warren, but Jacqueline thought otherwise.

In a case decided by the US Supreme Court this week, the court unanimously sided with Judy, the ex-wife. Relying on a state law, Jacqueline argued that the divorce decree had the effect of terminating Warren’s pre-divorce beneficiary designation. Writing for the court, Justice Sotomayor said that because the insurance proceeds were paid as part of a federal program (Warren had been a federal employee), federal law trumped state law, and federal law didn’t have a provision similar to the state law. Too bad for Jacqueline, even though the court hints that she is probably the person Warren wanted to receive the life insurance.

So what are the take away points? First and foremost, any estate plan, regardless of whether a trust, a will, beneficiary designations, payable on death designations, or any of the myriad estate planning options, should be reviewed regularly. An estate plan should be reviewed at least every three years, and more often when important things happen in your life. Birth, death, divorce or marriage are all events which should trigger a comprehensive review.

Second, why rely on a patchwork of joint ownership, beneficiary designations, payable on death accounts, or other designations for your estate plan? Like William, Anne or Warren, when life changed, they changed some of their estate planning devices, but not all of them. Wouldn’t it have been much simpler for each of them to have a comprehensive estate plan, such as a living trust, where only one change is needed when there is a life change?

We will never know why none of them chose to create a living trust. Maybe they thought they didn’t have enough assets for a trust, or maybe they were concerned that a trust would cost too much. Maybe they just didn’t want to take the time, or would get around to it later. Whatever the reasons, my guess is that Kari Kennedy, Bruce Friedman, and Jacqueline Hillman could teach us all about the importance of creating and maintaining a living trust.

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