If you are getting a divorce and you want someone other than your soon-to-be former spouse to receive benefits under your life insurance policies and retirement plans, a recent case from a federal appeals court shows how important it is to review these documents and update your beneficiaries accordingly. The case also shows how important it is to be represented by a knowledgeable attorney capable of picking up on ambiguities in divorce documentation.
In this case, West Virginia man Frank Baker Jr. listed his wife Patricia as the designated beneficiary on his life insurance policy. When the couple got divorced, they used a property settlement agreement (PSA) to determine how everything they owned would be split up. One paragraph of the agreement stated that Patricia was agreeing to relinquish “any and all right to any life insurance policies” on Frank’s life. That paragraph also stated, however, that Frank could “change the beneficiary” on any such policy.
Frank never followed up and when he died several years later Patricia was still listed as the designated beneficiary on a $250,000 policy, with Frank’s daughter Jessica listed as the contingent beneficiary (in other words, the person who receives the benefits if the designated beneficiary can’t or won’t). As beneficiary, Patricia demanded payment. But Jessica made a competing claim, arguing that Patricia relinquished any claim to the benefits in the PSA.
The case ended up in federal court, where the judge ruled that Jessica was entitled to the benefits.
Patricia appealed the decision and the appeals court found that the lower court judge had made a mistake.
According to the court, the PSA was ambiguous and could be interpreted to support Jessica’s argument that Patricia relinquished any right to the policy or Patricia’s argument that while she relinquished her ownership rights in the policy, Frank could keep her as beneficiary if he wanted to and his failure to change her status indicated his desire to do so. Because the PSA was unclear, the lower court would have to take another look.
It’s not clear at this point who will end up with the life insurance proceeds, but both parties could have been saved a lot of trouble if the PSA was drafted more clearly and if Frank had changed the beneficiary designation on his policy. If you’re going through a similar process, speak to a divorce attorney who can go through all your assets, plans and policies to make sure your beneficiary designations reflect your wishes.