Changing Beneficiaries Before Your Divorce is Final
Posted by Martin Heller Potempa & Sheppard, PLLC on August 17, 2018
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You may have the best intentions. In fact, changing beneficiaries on your life insurance policy could make perfect sense to you. As far as you’re concerned, your marriage is over – and the person on the other side of your divorce is not your surviving spouse. Why on earth should he or she seemingly “benefit” from your death?
It’s a question entertained by many involved in marriage dissolution matters. It could be as simple as your plan to ensure your children’s financial future is assured. Meanwhile, there is the possibility that your soon to be ex cheated on you – and you absolutely have no desire to reward infidelity.
Truth be told, the Tennessee code speaks directly to the prospect of changing beneficiaries after a divorce complaint is filed. In Tenn. Code Ann. § 36-4-106, the Legislature specifically addresses insurance policies by placing injunctions “restraining and enjoining both parties” from doing the following:
… voluntarily canceling, modifying, terminating, assigning, or allowing to lapse for nonpayment of premiums, any insurance policy, including, but not limited to, life, health, disability, homeowners, renters, and automobile, where such insurance policy provides coverage to either of the parties or the children, or that names either of the parties or the children as beneficiaries without the consent of the other party or an order of the court. “Modifying” includes any change in beneficiary status.
Among other issues, a recent Tennessee Supreme Court case discussed concerns involving beneficiary changes. You might be interested in reading the context and relevancy of the decision.
Supreme Court on Changing Beneficiaries
Coleman v. Olson was decided by the Supreme Court of Tennessee on June 15, 2018. According to the facts presented in the legal opinion, Jessica Olsen filed a divorce complaint against Bryan Olsen. At the time, Jessica was quite ill and was most likely concerned about providing for her minor child in the event of her death. A week after she filed the divorce papers, Jessica changed the beneficiary on her life insurance policy.
During the pendency of divorce proceedings, the statute requires consent for any modifications naming beneficiaries. From all appearances, Jessica did not inform Bryan that she was replacing his name with Rose Coleman, her mother. The minor child became the contingent beneficiary.
The timeline on this is remarkable. Jessica filed for divorce on July 5, 2012. Four days later, she went to the emergency room and learned of the severity of her illness. On July 12, 2012, Jessica changed the beneficiary designation. A week later, she sadly passed away. Subsequently, her mother collected approximately $400,000 in life insurance benefits.
Within a week of her daughter’s death, Rose petitioned the court for custody or grandparent visitation. She claimed that her granddaughter was neglected and expressed concern that her exclusion from the child’s life would be harmful.
Bryan informed the court that he had no intentions of denying Rose grandparents’ visitation rights. Therefore it was not necessary for the court to order them. However, Bryan countersued for the life insurance benefits. He felt that the changes were made in secret and were prohibited by law.
More on the Beneficiary Changes
Rose lived in Massachusetts and was at her daughter’s side during her hospital stay. Although Jessica was intubated, she was able to communicate through various means. According to Rose, her daughter wanted the beneficiary changes made for the benefit of the child. Rose was unaware that Tennessee law required consent for modifications after filing the divorce complaint. She wrote a note for her daughter making the changes – which was signed, witnessed and notarized.
According to Bryan, he did not learn about the modification until after he opened the estate. He questioned whether Jessica’s signature was really hers and also cited the possibility of fraud. Of course, there was also the issue of the injunction disallowing any changes without his consent.
At the trial court level, the judge found that Jessica’s changes were because of “unintentional or accidental undue influence.” The court decided that Jessica intended to provide for the minor child – and awarded the benefits to her. It was also determined that the injunction violation was not “contemptuous” or intentionally defiant.
As a result of the change, Rose was ordered to provide an accounting of any monies spent from the insurance proceeds and deposit funds into the court’s registry. When Rose provided the financial breakdown, the court found that some reimbursements she made to herself were inappropriate. A money judgment was entered against her.
Bryan appealed the trial court’s decision. Upon review, the Appeals Court ruled that he should receive the insurance proceeds. The basis of the decision centered on Jessica’s failure to comply with the injunction concerning modifications to insurance policies.
Supreme Court Returns Case
The Supreme Court reviewed the rulings by both the Trial Court and the Court of Appeals. It first brought up the point that neither party asked for the child to receive the insurance proceeds. Additionally, there was no finding of fraud or other abuse that would suggest the creation of a constructive trust for the child.
The Supreme Court’s opinion points out that Jessica failed to comply with the injunction just one week after she filed for divorce. That said, the divorce action ended after her untimely death, meaning the injunction was no longer effective.
The court determined that this was a novel issue and remanded the matter “to consider the equities of the parties and provide an equitable remedy for a violation of the statutory injunction.”