Aug
26
Handwritten Note Insufficient to Effectuate Beneficiary Change
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After his divorce 17 years ago, Jon bought a $100,000 insurance policy to fulfill his obligations under the divorce settlement to secure his child support obligations for his daughter Nikki.  He named his sister Joetta as beneficiary, and the policy application stated that he was "[n]aming sister as beneficiary so ex-wife can't control the death proceeds."   

Jon died in 2013.  Nikki reached majority age and Jon's child support obligations ended in 2008. Joetta remained the beneficiary.  Jon left behind a handwritten note purporting to leave his entire Estate to Nikki (with the exception of a small bequest to another relative).   The note directed Nikki to "sell everything you don't want and bank it."  At the end of the note it listed the policy number and the name and phone number of the insurance agent.  Nikki and Joetta literally decided to make a federal case out of it, each submitting a claim to the life insurance proceeds.  

The Minnesota court granted summary judgment to the sister Joetta, and the 8th Circuit Court of Appeals affirmed.  The court reasoned that Jon did not take adequate steps to change the beneficiary from Joetta to Nikki in accordance with the policy's change of beneficiary form and requirements.  The contract required a beneficiary change to be filed by the policy owner with the insurance company before death for it to be valid.  The handwritten note was not sufficient to fulfill that requirement. 

Second, Nikki argued that Joetta was required to hold the proceeds in "constructive trust" for her benefit.  The court also rejected this argument, holding that the divorce requirement was premised on Jon's child support obligation, and that obligation ended before Jon's death.  

This is an important lesson in dealing with non-probate assets such as life insurance.  Many clients mention naming their sister, parent or friend on a life insurance policy insisting that the named beneficiary will "do the right thing" and use the proceeds for the benefit of their children.  Doing so is fraught with potential problems, not the least of which is that there is no legal obligation for the recipient of the funds to use them for your children.   This is especially true with divorced or soon-to-be divorced policy holders.   It is true that naming a minor child on a policy raises issues - he or she will not be old enough to exercise legal control over the funds and therefore a separate guardianship proceeding would be required.  In that instance, in the State of New York, the funds are held jointly by the Guardian and the Court, and the Guardian must seek approval each time a withdrawal is desired.  

The better course of action is to establish a living trust naming your kids (or others) as beneficiaries and identifying a Trustee, naming that trust as the beneficiary of your policy.   A less expensive option is to create and properly execute a Last Will and Testament that includes minor's trust provisions, and then identifying "my estate" as your contingent or primary beneficiary.   A quicker, although not preferred, option, is to name an existing Uniform Transfers to Minors Act (UTMA) account as the beneficiary.  

Jon could have easily ensured his wishes were met by properly changing the beneficiary of the life insurance policy, and even going one step further to prepare a valid Will.  Doing so would have avoided the emotional and financial expense of protracted litigation, which undoubtedly disrupted the relationship between his daughter and her aunt.  

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