One of the biggest misconceptions in estate planning is that a will governs all of your assets and anything else that your heirs or a beneficiary might inherit. But a recent court case is a reminder that executing your will is not the last step in completing your estate plan.
The general rule is a will cannot trump the designated beneficiary on an insurance form. That was the holding by a federal court earlier this year, reaffirming the general rule that, even if you specify a change of beneficiary in a will, it has no effect. (Arkansas law allows an exception to the general rule: Arkansas holds that a change of beneficiary of a life insurance policy can in fact be accomplished in a will.) In the federal case, a man had named one of his children as the beneficiary of a life insurance policy provided through his employer. He remarried in 2001 but did not designate his new wife as the beneficiary.
After the man was diagnosed with cancer in 2010, he told his employer he wanted to make the change and was given the form to do it, but he failed to return the form after he signed it. A short time later, he learned that he only had a short time left to live. He still wanted to make his current wife the beneficiary so he asked his daughter to get a form will and wrote in the clause: “[A]ny and all life insurance and benefits shall be distributed to [the wife].” The man died the same day.
The wife claimed the policy proceeds from the employer using the language in the will, explaining to the insurance company that her husband had not had time to complete a change of beneficiary form due to his sudden death. The insurance company denied the claim due to its obligation to provide benefits under ERISA rules which required the specific documents provided for the changes, stating that a “[W]ill has no bearing on a Group Life Insurance benefit due to the plan provision set in place regarding beneficiaries.”
The wife next sent the insurer the beneficiary form that her husband had signed in 2010, but the insurer still denied it based upon the fact that the latest form on file at his death was dated 1991. The Court agreed that the insurer was bound by ERISA and, as long as their action was “reasonable” and “supported by substantial evidence,” its position was the correct one.
To avoid such a result, first remember that any time there is a major life change such as a birth, death, or marriage (and especially a remarriage), review your estate plan with an experienced estate planning attorney. There are numerous options for making sure that your insurance proceeds are readily available for distribution upon your death, such as irrevocable life insurance trusts. An experienced attorney will be able to help you choose the best option.