July 15, 2017
Don’t Be Dead-Wrong or Wrong and Dead.
Don’t Be Dead-Wrong or Wrong and Dead.
Are you divorced? Was your spouse previously divorced? If so, here’s a piece of advice you can’t afford to ignore – make sure that the beneficiary of the divorced person’s life insurance and IRA and the beneficiary and co-owner of the divorced person’s bank account are who you want. Not doing that and not having the desired beneficiary or co-owner can result in unintended, serious and usually irrevocable bad consequences. Why is that?
When a couple divorces, the law automatically takes care of things like eliminating gifts to the former spouse under the other spouse’s will. The law also eliminates automatic transfer of real estate owned by spouses in survivorship to the surviving co-owner former spouse. But the law doesn’t do that for life insurance, IRA and bank account beneficiaries or co-owners of bank accounts. Let me say that again: the law doesn’t automatically remove the former spouse as the beneficiary of life insurance, IRAs or bank accounts or as a co-owner of bank accounts simply because a divorce has happened. If those details aren’t taken care of and the insured spouse or owner of the IRA or bank account dies, that spouse will be dead and wrong.
I didn’t represent Sarah or James, her husband of three years who had been divorced from his first wife. One afternoon, shortly after James died unexpectedly, Sarah called me frantically. Sarah had a one year old, was pregnant with her second child and had only recently left her job to be a stay at home mom. She had been holding it together fairly well considering her situation until, within a three-hour period, Sarah learned that she wasn’t the beneficiary on James’ life insurance policy, IRA or money market account and wasn’t getting the inheritance under James’ will that she had counted on.
Worse, the beneficiary was James’ first wife Carly, whom he had named as beneficiary and added to his money market account after he and Carly married. This short childless marriage ended after James discovered Carly’s affair. James assumed that since Carly was no longer his wife, she was no longer his beneficiary. But his assumption was horribly wrong. He and Carly handled what appeared to be a simple divorce without the benefit of legal advice and so had no guidance to avoid the pitfalls.
James and Sarah thought they’d protected their growing family in the unlikely event James died at an early age. After all, James had a sizable life insurance policy, IRA and money market account. James and Sarah even got new wills after the birth of their first child. But James never bothered to contact his insurance agent, financial representative or banker to remove Carly and name Sarah, or even his estate, as beneficiary. And it seemed obvious that James intended for Sarah rather than Carly to get his assets on his death. But they were bound by what James had done and not what he intended to do.
In the end, with few legal options, whether Sarah received any piece of James’ insurance proceeds, IRA or money market was up to Carly – and Carly’s generosity, guilt, or personal sense of right and wrong. The law certainly didn’t require Carly to share her inheritance with Sarah at all!
There is a similar risk for pension plans and 401(k) plans. They are governed by complex documents and even more complex laws. The best advice for those plans is to consult the plan administrator or a knowledgeable professional.
Fortunately for Sarah, without requiring James to take any steps, the law did preserve some of James’ other assets for her. For example, all gifts James had made to Carly under his will were automatically extinguished the moment he and Carly divorced. And Carly’s right to James’ half interest in their jointly owned home ended when the marriage ended – although Carly still officially owned her own half interest because James didn’t follow up on the necessary steps to put the entire house in his name.
This entire mess could easily have been avoided, and Sarah would have received the full inheritance James wanted her to have, if he had understood his position and taken the time to designate Sarah as his life insurance, IRA and money market account beneficiary, removed Carly as co-owner of the money market and finished dealing with the real estate ownership.
Don’t let what happened to Sarah, happen to you, a loved one or a friend. And certainly, don’t allow yourself or your loved one – like James – to be dead and – wrong.
Thanks to RJ Media Group for publishing this post in the July 13, 2017 Cheshire Citizen.« Back to all news