This estate battle shows how overlooking small details can result in a huge estate planning disaster. Four court cases and several years after this estate battle began, a family won a case that could have been easily prevented with an updated beneficiary designation form, as reported in The Dallas Morning News article “The way out of the ERISA trap: A tale of divorce, death and money.”
Mike and Wendy married and then divorced. The divorce decree clearly stated that Mike was awarded all of his employee benefits, including his life insurance. However, when Mike logged into his employer’s benefits systems, it would not allow him to delete his ex-wife as the beneficiary of his life insurance. It may have been programmed that way. There are laws concerning removing spouses from employee benefits. Or it was a glitch. Either way, Mike did not pursue it.
When Mike died, he was survived by his parents, who claimed his estate, but the $377,000 life insurance policy was not part of his estate because his ex-wife was still listed as the beneficiary.
His parents filed a claim with the insurance company for the proceeds of the insurance policy.
The first court they filed in was the probate court, so they could be properly recognized as Mike’s heirs. The probate court found in their favor and named Mike’s dad as the independent administrator of his estate.
The second court was federal court. That’s because employee benefits are governed by a federal law ERISA—the Employee Retirement Income Security Act—that controls employee benefits, including employer-provided life insurance. These matters can only be dealt with by a federal court.
The federal court ruled that because Mike’s ex was on the beneficiary form, she was the rightful owner.
However, Wendy had waived her rights to the insurance benefits when she signed off on the divorce decree. Mike’s parents were determined to win this battle.
Their legal team took the argument next to court three—the original divorce court. Mike’s dad, in the position of the estate administrator, argued that while Wendy did have a right to receive the money under ERISA, she did not have a right under state law to keep it. She had waived that right in the divorce decree. The divorce court agreed and found that Mike’s estate owned the proceeds. The money was to be turned over to Mike’s parents.
Court number four came when Wendy petitioned the state appellate court to overturn the award. She lost.
What were the factors that allowed Mike’s parents to overcome this estate planning disaster and win this case? The divorce decree contained clear language regarding the life insurance policy. If it had been poorly drafted, the results could have been different. Mike’s parents went through all the correct procedural courts—establishing heirship, then probate, then divorce enforcement case.
One step could have been added to avoid a further estate planning disaster: a restraining order so that the ex could not squander the money between the time that she received the proceeds and when the final judgement was rendered.
Reference: The Dallas Morning News (Jan. 24, 2021) “The way out of the ERISA trap: A tale of divorce, death and money”