Help Your Clients Avoid Easy Post Divorce Mistakes
By Wendy O. Hickey, Esq.
With another detailed separation agreement approved by the court, my satisfied client and I left the court house together last week agreeing to chat soon. As I walked away from her, I started drafting the post divorce housekeeping email I would send her in my mind - this time my email would be much easier as I was representing the spouse with relatively few assets in her own name who would be receiving a series of transfers from her ex-husband. Thinking about this got me wondering how many practitioners send their clients post-divorce to do letters or emails. If this is not something you regularly do, perhaps you should start.
The post divorce follow up letter is an easy way to help your client understand and remember what they need to do to comply with the terms of the agreement they just entered into. Often times we draft complex separation agreements of some fifty or more pages. We can and do go over the agreements carefully with clients but we have to remember, much of the agreement is not written in the kind of plain English our clients are used to reading. Occasionally our clients are lawyers and we expect them to understand everything the contract says. But, it is not unusual for an otherwise highly capable lawyer to be incapable of working on their own “case” so I still recommend the post divorce follow up letter. Because even if they understand everything they need to do, there are those annoying housekeeping issues that are so easily overlooked in the grand scheme of life - like changing beneficiary designations at the appropriate times.
Across the board, it is hard to get people to recognize or discuss their own mortality. So, urging someone to promptly change beneficiary designations may still fall on deaf ears. Unpleasant as the topic may be, this article will discuss some of the issues which can arise when the post-divorce client dies prior to taking care of some of these post-divorce housekeeping matters.
A common security mechanism for the payment of child support and sometimes alimony is life insurance. If all of the existing life insurance is to remain in place as security there is nothing to worry about. But, what about when the client has the right in their agreement to create a life insurance trust to benefit minor children? Presumably if the right to form such a trust is in the agreement, it is because the client had some sort of concern about their former spouse ending up with a windfall upon their death and not using it properly for the benefit of the children. Even so, how many of them really follow up on that and how many just leave the beneficiary designation in the name of the prior spouse? And if they do leave the designation in the name of the prior spouse, who gets the money in the event of an untimely death - the prior spouse or the kids?
A divorce does not revoke a designation of beneficiary unless the divorce proceedings or the insurance contract so provides. Stiles v. Stiles, 21 Mass.App.Ct. 514, 515 n.3 (1986). Typically, the payor spouse is required to maintain then-existing life insurance policies for the benefit of the children, until emancipation. When the payor spouse asks for the right to create an insurance trust to hold the proceeds of any such policies for the benefit of the children, by agreeing such a trust may be created to hold the insurance proceeds, it is likely the former spouse has waived his/her right to any proceeds should the payor spouse die before changing beneficiary designations or creating a life insurance trust.
Massachusetts recently adopted the Uniform Probate Code which, until now, had been a source of instruction on this issue. UPC, section 2-804 “represents a legislative determination that the failure of an insured to revoke the designation of a spouse as beneficiary after dissolution of the marriage more likely than not represents inattention.” Hill v. DeWitt and USAA Life Insurance Co., 54 P3d. 849, Colo. Sept. 9, 2002 (emphasis supplied).
This is true even if a payor spouse fails to specifically identify all applicable policies in the Separation Agreement. This is especially so if the life insurance exhibit requires the payor to maintain “current” or “existing” policies for the benefit of the children as is common practice. Further, the use of the term “any” employer-provided life insurance has been enough to require the proceeds be directed to the parties’ children by imposing a constructive trust. Flanigan v. Munson, 818 A.2d 1275, N.J. (Apr. 3, 2003). In Flanigan, the deceased wife’s life insurance proceeds were paid to her new husband - whom she had named beneficiary upon her re-marriage. That husband was ordered to account for the proceeds; and to pay them over to the children born of his wife’s prior marriage. The same was true in the matter Sulzer v. Diedrich (Lawyers Weekly USA No. 9926128) Wisconsin Supreme Court No. 02-0036, July 3, 2003.
Many cases suggest that a payor’s failure to change the beneficiary designation amounts to a wrongful act on his part. Therefore, absent an intervening proceeding, the surviving children would have an action for contempt against the payor’s estate. It is hard to imagine surviving children having to sue their deceased parent’s estate for contempt over an unfortunate failure to correctly designate beneficiaries post divorce. In Green v. Green, 13 Mass.App.Ct. 340 (1982) the children were successful in their suit against their Father’s second wife because he changed the beneficiary designation on his insurance policies to name the second wife, in violation of the terms of the separation agreement. The second wife was required to pay the children the proceeds she had received, with any deficiency being made up by the father’s estate. The Father’s wrongful act, in changing the beneficiary in Green is akin to what may be the decedent’s wrongful act in failing to change the beneficiary of life insurance to name his children. In both these circumstances, the proceeds should go to the child so, if necessary, a contempt action by the children should be successful.
There are, of course, different schools of thought about life insurance proceeds in the event a beneficiary designation is not changed. The minority rule appears in states which have enacted a statutory revocation in accordance with the UPC so that the former spouse cannot benefit in the event there is a divorce and a failure to change beneficiaries. Many states look for the intent of the deceased spouse. Separation Agreements are often used to determine intent. However the trend is to require a specific waiver of life insurance proceeds. Finally, a few jurisdictions hold fast to the contract theory approach - i.e. life insurance is a third party benefit contract; and applying strict contract law, the proceeds get paid to the person named on the policy at the time of death.
Although Massachusetts has not specifically ruled any particular way on this issue, a careful reading of Stiles v. Stiles, 21 Mass.App.Ct. 514 (1986) may be said to employ a combination of the contract approach, plus the intent of the deceased spouse as indicated in the separation agreement.
Where a waiver is clear and unambiguous as to specific items, it is the exception to the general rule that the designated beneficiary takes. Bergeron v. Leslie, 2000 WL 537273 (Mass. Super.). The question turns on what type of retirement plan is involved and, if it is a qualified retirement plan, what an acceptable waiver is under ERISA. In sum, changing the beneficiary designation on qualified retirement assets is crucial if your client does not want his/her former spouse to get more than the divorce agreement provides at the time of their death.
Typically practitioners include some sort of marital balance sheet or description of which party will retain what portion of retirement assets as part of the agreed equitable distribution of the marital assets along with a specific waiver within the body of the separation agreement. After the divorce, it is common for litigants to continue contributing to retirement plans at their place of employment or on their own. It is unlikely to cross their mind that their former spouse might get those post-divorce contributions upon their death - but this is a very real possibility if they are not careful.
It used to be that, in Massachusetts, “[V]oluntary, explicit, and specific waiver of beneficiary rights in a settlement agreement was valid, notwithstanding the fact that it was not part of a QDRO.” Wennett v. Capone, 1996 WL 91931 (Mass.Super.). Typically separation agreements contain the following language or something close thereto regarding waiver: “[T]he Wife/Husband expressly waives and relinquishes any and all claim, right, title and interest s/he may have, whether arising out of the marital relationship of the parties or otherwise, in and to any bank or investment accounts, certificates of deposit, trusts, securities, bonds, shares of stock, IRA, pension or profit sharing plans, inheritances, past, present or future, causes of action, or other form of property, either real or personal held by Husband/Wife individually or with others, or in any other form for the benefit of the Husband/Wife.” Such mutual waivers are almost identical to the waivers discussed in Steiner v. Bank One Indiana, N.A., Indiana Court of Appeals No. 02A04-039-CV-484 (March 25, 2004) which held that “the terms of a settlement agreement are not ambiguous merely because the parties disagree as to their interpretation” when an ex-spouse attempted to receive her deceased former spouse’s IRA disbursement after waiving her rights to these funds in the separation agreement because the deceased former spouse neglected to change the beneficiary designation.
In 2009, the US Supreme Court decided Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, et al., 129 S.Ct. 866 (2009). Kennedy changed the landscape of what qualifies as a waiver by a former spouse in connection with a qualified retirement plan. Until that point, there were different schools of thought. Some jurisdictions required an actual QDRO be filed with the plan administrator waiving the former spouse’s rights in the plan, other jurisdictions applied the “federal common law approach” i.e. looking at the surrounding circumstances, including language waiving benefits in divorce decrees. Id at 877. Kennedy makes clear neither approach is quite right. In Kennedy, DuPont argued that the anti-alienation provision of ERISA requires a QDRO to waive rights in a qualified plan after divorce. See Kennedy v. Dupont Savings and Investment Plan et al, 497 F.3d, 426, 431 (C.A.4 2007). While the Fifth Circuit approved of that argument, the Supreme Court pointed out that a QDRO does not take care of the problem. “[A] QDRO by definition requires that it be the “creat[ion] or recogni[tion of] the existence of an alternate payee’s right to or assign[ment] to an alternate payee [of] the right to, receive all or a portion of the benefits payable with respect to a participant under a plan.” Id at 873. Simply put, a QDRO does not waive a right, it creates one.
The Supreme Court mandate in Kennedy simplifies the analysis. Going forward, the enforcing court must defer to the plan documents for determination as to who is entitled to the benefits. Id at 875. ERISA mandates that plan administrators follow plan documents in distributing benefits. See, 29 U.S.C. § 1104(a)(1)(D). To do otherwise would undermine the uniform administrative scheme governing ERISA and promote unnecessary litigation. Id.
While failure to change beneficiaries on a life insurance policy or, perhaps a non-qualified retirement asset, is not likely to result in an unplanned windfall to the former spouse in Massachusetts, we now know that failure to change the beneficiary on a qualified plan can have huge unintended consequences.
A simple post divorce reminder letter to your client highlighting some of the things they should do to protect themselves and their estates in the future, including changing beneficiary designations where proper, may prompt a client to do so which could very well prevent future litigation for the client’s probate estate. Even though the law is pretty clear, we all know there are lawyers out there who would take the case and argue intent, especially on a life insurance or non-qualified retirement asset, with the hope of reaching some sort of settlement for their ex-spouse client. A simple reminder to your client can help ensure his/her kids do not have to face the added stress of having to sue their remaining parent in the event of an untimely death of the other parent.
I leave you with a final thought. What, if any, ethical obligations do we have to make sure our clients do these kinds of post divorce housekeeping items? Is one simple follow up letter or email sufficient when viewed through the eyes of the Board of Bar Overseers? Or do we have some higher obligation to oversee these kinds of things get accomplished? How many letters should we send and should we request the clients copy us on beneficiary designation changes to hold in our files? Does it matter if the beneficiary changes cannot be made for several years and, in that case, do we have an obligation to contact former clients years later to remind them to make changes once they have a right to do so? While I have personal opinions, I don’t know the answer to these questions and pose them to provoke some further thought. Any answers submitted to the co-chairs of this newsletter will be considered and, perhaps, published in future editions.
Wendy Hickey is a graduate of Suffolk University School of Law (2003 cum laude), Suffolk University (1998 cum laude) and Fisher College (1994). She has been working at Nissenbaum Law Offices since 1994 first as a paralegal and, since 2003, as an associate handling all aspects of family law cases. Wendy is admitted to practice in Massachusetts (2003), the U.S. District Court (Massachusetts 2004), the U.S. Court of Appeals (1st Circuit 2007), and the U.S. Supreme Court (2011).
Wendy is active in the Boston Bar Association (Member of the Family Law Section Steering Committee and Co-Chair of the Family Law Section Newsletter Committee) and is also a member of the Massachusetts Bar Association, the Women’s Bar Association and the American Bar Association. She has lectured on panels at the Boston Bar Association and the Massachusetts Bar Association on various family law topics.
Wendy co-authored an article “What You Need To Know About Vaughan Affidavits” which was published in Massachusetts Lawyers Weekly, October 27, 2006 and regularly writes on various family law topics for the Boston Bar Association Family Law Section Newsletter. Wendy was named a Rising Star by Boston Magazine’s publication of Super Lawyers in 2011
Kennedy did not address what would happen in the instance of a non-qualified retirement asset not governed by ERISA because that was not an issue in the case. So, there is still a waiver argument to be made in accordance with Steiner when the plan involved is an IRA or other non-qualified plan.