After Divorce, Check the Beneficiary on Pension and Life Insurance Forms

Several years ago, I stopped handling divorce cases because the estate planning and elder law areas of my practice became so important. However, because divorce is such a large part of our culture, and since people who have been divorced need estate planning, it is important for me to keep up with what is going on.

Some recent cases in Pennsylvania have dealt with the idea of pension or life insurance beneficiary forms in the context of divorce, and they make for interesting reading. In one case, the man got divorced in 2002. After his divorce, however, he failed to change his employer-provided group life insurance beneficiary form to remove his ex-wife. Then he died in 2006, leaving a will that gave everything to his nephew.

The insurance company got a claim form from the ex-wife, processed it and paid her the death benefit. They did this even though the nephew had given them written notice that the will called for the money to go to him. After a split decision among the three Superior Court judges, the case of In re: Estate of Sauers was decided in favor of the ex-wife getting the life insurance money. The arguments and analysis are very interesting and they boil down to this: group life insurance is governed by a federal law, and the federal law supersedes the state law. So even though the outcome may seem wrong, the case was decided correctly under the prior cases and the conflicting statutes.

So it seems that the big boys won this one, meaning that a federal law can take priority over a state law, even when they directly conflict with each other. In school, we called this ‘occupying the field.’ It is sort of like the Steel Curtain defense of the ‘70s lining up against your local midget football team. The outcome is certain before the whistle blows. If the federal government thinks that something is important enough to pass a law to control it, then the states have to give way.

This concept has been discussed and rehashed a lot over the past 10 to 15 years as the government in Washington has taken steps to become more involved in our lives. You might have heard discussions on the Sunday morning news programs about the issues of states’ rights or federal preemption. It is heady stuff, and the very same debates were conducted by Adams and Jefferson way back when our young nation was trying to formulate our unique form of democratic government. The idea of states’ rights grew out of dissatisfaction with the often irrational decisions of a king who was 3,000 miles away. Most of our forefathers did not want a super-strong central (federal) government. But I digress.

What impact does this case have on estate planning? Well, the person whose will or trust I am writing may intend to leave money to one person or another, but that money might be in the form of a life insurance policy, an annuity, an IRA, a 401(k), or a pension plan of some sort. These are all controlled by beneficiary forms, and as we saw from the case above, if the form does not say what the will or trust says, the money may not go where the person intends.

For example, not too long ago I wrote a trust for a man who was divorced. His minor child was the beneficiary of the trust, which was designed to provide income and support for her through her college years. I asked him where the money was coming from to fund the trust because his financial statement did not show many assets. He told me that he had a group life insurance policy through his work, and that he was planning to use the proceeds from that policy to fund his trust. When I asked him who the beneficiary was, his answer was his ex-wife. Yahtzee! If he had left it that way, she would get the money that was supposed to go to his daughter’s trust and the trust would fail.

You might be thinking that the ex-wife might do the right thing and put that money into the trust for the girl anyway. But you would be wrong, since the daughter was not hers, but his from his first marriage. Not only would she not put the money into the daughter’s trust, but the two of them didn’t even speak. The daughter lived with her natural mother, and had no relationship with the husband’s second wife. As you can see, oftentimes the answer to the question involves asking more and more questions.

Pennsylvania has a law on the books that declares that a divorce will automatically remove an ex-spouse from the beneficiary designation of life insurance policies, annuities, pension or profit-sharing plans, but it was that law that the Sauers’ case overrode. Therefore, you cannot rely on that law to do your estate planning for you. The much safer practice is to take the time and make the effort to change the beneficiaries after a divorce. Your friendly neighborhood estate planning attorney can guide you through this maze.

Christopher M. Abernethy has been practicing law in Hampton Township since 1976. He focuses on elder law, which includes wills, trusts, powers of attorney, living wills and probate matters. He also is proficient in all aspects of real estate law and business law. He is a member of the National Association of Elder Law Attorneys and the AARP Legal Services Network. He can be reached at 412-486-6624 or by email at cabernethy@aaylaw.com.