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Employees are Responsible for Beneficiary Designations

Many employees have a life insurance policy provided by their employer. Commonly, they name their spouse as beneficiary, and think nothing more about it. Everything is fine unless one of two things happen: (a) the spouse passes away before the... 

employee, or (b) the employee divorces the spouse. Here's what can happen:SPOUSE PREDECEASES: When the employee dies, the benefits will be paid to whoever is named as beneficiary. If the spouse is named as "primary beneficiary," and the spouse has predeceased, the benefits will be paid to the "contingent beneficiary," if one is named. If the employee has not named a contingent beneficiary, the benefits will be paid to the employee's estate, and will have to go through the probate process. So be sure you have named a contingent beneficiary.DIVORCE: Michigan law provides that a divorce revokes a prior beneficiary designation in favor of a spouse, unless the judgment of divorce provides otherwise. So generally, if you unintentionally leave your spouse as beneficiary of a life insurance policy, that designation is revoked by the divorce, and the proceeds will go either to the contingent beneficiary or to your estate. That's the Michigan law. But federal law preempts or overrides state law, and an employee benefit is covered by the Employee Retirement Income Security Act (ERISA). ERISA provides that the proceeds of an employee-sponsored life insurance policy must be given to the beneficiary named on the beneficiary designation. So if the employee does not specifically change the beneficiary designation after his divorce, the proceeds will be awarded to his ex-spouse, regardless of what the Judgment of Divorce says.CASE STUDY: Warren named Judy, his wife at the time, as the named beneficiary on his life insurance policy. In 1988, the couple divorced. In 2002, Warren married Jacqueline. Warren died suddenly in 2008, without ever having changed the named beneficiary from Judy to Jacqueline. As a result, the ex‑wife Judy filed a claim for the $100,000 in life insurance proceeds, and was paid them. Jacqueline sued Judy in a state court to recover the life insurance proceeds. She claimed that not only is it logical that Warren would have wanted it that way (and maybe Warren even told Jacqueline that she would get the life insurance proceeds.) Moreover, she pointed out the Michigan law that says that a divorce automatically revokes a beneficiary designation naming the spouse. However, the U.S. Supreme Court sided with Judy, the former wife, notwithstanding that there was a certain logic to the position that Warren most likely would have preferred that the proceeds go to his wife at the time of his death. The unassailable fact was that, though he had ten years after his divorce from Judy and six years after his remarriage to Jacqueline to do so, Warren never changed the named beneficiary on his policy. The provisions of ERISA prevailed, and the proceeds were given to Judy, the ex-wife.THE MORAL OF THE STORY: The case is an object lesson in the importance of keeping one's estate plans, including beneficiary designations, current. Had Warren taken the simple step of filling out the form to change beneficiaries on his policy sometime before he died, assuming that was his wish, the protracted litigation that ensued after his death could have been avoided. If you have any questions about this or any other issue, or any doubts about whether your estate plan is up to date, please do not hesitate to contact an attorney at Creighton McLean & Shea PLC. 

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Livonia, MI 48154

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