Will the Girlfriend Get the Life Insurance or the Wife?
Well that catchy title comes from Nj.com’s recent article entitled “Who will get my boyfriend’s property if he dies? Me or his wife?” . The idea of the article is that a couple that’s lived together for some time where one is still married to another can create some issues. The article claims that if the boyfriend has a life insurance policy and 401(k) with the girlfriend as beneficiary, they should draft a will to make certain that the estranged wife does not get that money. Let’s break this down a little more.
Although this is a bit salacious (shall we say, a bit “soap-opera-esque”), this illustrates things that everyone should know about beneficiary designation forms. While a Last Will and Testament is always recommended, the beneficiary designation forms, and not the Will, is the first key consideration here.
FIRST ABOUT BENEFICIARY DESIGNATION FORMS. Generally, anything that passes pursuant to a beneficiary designation form, such as an IRA, 401(k), and insurance products (such as life insurance policies and annuities), will not pass through probate. It’s the beneficiary designation that is key for these types of assets. It is very important to understand that your Last Will and Testament (or your trust, if you have created one), does not determine where these assets will go upon your death. Only in the relatively rare circumstance if the owner has not filled out a beneficiary designation form, or if the beneficiaries on the form have themselves passed away before the owner, will the assets in these accounts devolve to the estate of the owner (and go through probate).
So the beneficiary designation forms are critical to estate planning, sometimes even more so than a will or trust, particularly if most of the client’s assets are these types of assets.
SECOND ABOUT BENEFICIARY DESIGNATION FORMS. Under federal law, the owner of an IRA or 401(k) (or any other type of tax-qualified retirement account such as a 403(b)), must name his or her spouse as the beneficiary of the IRA or 401(k), and if the spouse is not named, the spouse must give written permission naming another person. So the article above is a little skewed and unrealistic in that it does not seem to get this fundamental point. How did the girlfriend become the beneficiary of the IRA? Did the wife give permission? Not likely.
But this is important to think about. Because if a person is separated from his or her spouse, the retirement assets will go to that spouse, even if they have not lived together for many years. Forget about girlfriends for a moment. If a person is separated from his or her spouse, they don’t really have much control over the divestment of retirement assets until there is a community property partition, and one has to obtain that through the courts using a divorce lawyer.
THIRD ABOUT BENEFICIARY DESIGNATION FORMS. Life insurance and annuities are not the same as IRAs and 401(k)s in this respect. A spouse can name a non-spouse the beneficiary of a life insurance policy or annuity. It can be the children, or the girlfriend, or a lover. This does happen. But here is the rub. Both federal courts and Louisiana state courts have ruled that life insurance policies and annuities, if acquired during marriage, are community property just like any other community property asset. So the spouse is entitled to one-half of those assets if that spouse is not named the beneficiary.
Further, even if a life insurance policy or annuity is not acquired during the marriage, if any premiums which are paid during the marriage with community property income (in most cases when there is not a premarital agreement), the surviving spouse will have the right to be reimbursed one-half of any premiums paid on the policy.
So the bottom line here is that in most cases when there is not a premarital agreement, the surviving spouse will usually at least be entitled to a portion of the amount paid out in life insurance. However, the surviving spouse might have to file a lawsuit to get it.
CONCLUSION. The takeaway from all of this is that any asset that has a beneficiary designation form generally does not pass through a Last Will and Testament. And even though life insurance producers promote these as “not passing through probate” (and they are correct in saying that), it does not mean that careful planning with respect to these assets is not warranted, particularly in situations even remotely like factual scenario in the article. Assets that devolve pursuant to a beneficiary designation form generally have to be approached more carefully than other assets in cases of a failed relationship or marriage, and these assets generally, if they are large, can pose the most problems, even more so than probate or wills.
In this scenario, not only may you need the advice of an estate planning attorney, but a divorce attorney as well.
Although I am not a divorce attorney, I am certainly an estate planning and tax attorney. BOOK A CALL with me, Ted Vicknair, today if you want to learn more about how these principles might apply to your particular situation.
Reference: nj.com (June 21, 2021) “Who will get my boyfriend’s property if he dies? Me or his wife?”