Divorce, Death and Details: Can Create Estate Planning Disasters

This estate battle shows how divorce and small details can become huge headaches, especially for Federal employees.  Four courts and several years after this estate battle began, a family won a case that could have been easily prevented, as reported in The Dallas Morning News article “The way out of the ERISA trap: A tale of divorce, death and money.”

The divorce decree clearly stated that Mike, an employee of the Federal Government, 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. However, Mike did not pursue it.

Soon after, Mike was stricken with cancer.  He had all the treatments available, but died less than a year later. When Mike died, he was survived by his children, who filed to open his estate, but the $377,000 life insurance policy was not part of his estate because his ex-wife was still the beneficiary.

The administrator of his estate, his father, filed a claim with the insurance company for the proceeds of the insurance policy and was told that the money was paid to the beneficiary, the former wife.  After filing in probate court to claim the proceeds, the probate court ruled in favor of Mike’s children.

The former wife then went to federal court, the second 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 estate.

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 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 father went through all the correct procedural courts—establishing heirship, then probate, then divorce enforcement case.  Remember, in a divorce and small details can become huge headaches for Federal employees.

One step could have been added: 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”

 

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