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In the recent case of Lett v. Henson (decided on March 17, 2016), the Michigan Court of Appeals had to consider whether the named beneficiary on a life insurance policy was really entitled to collect the benefits or not. The holding in the case reinforces the need to keep your beneficiary designations up-to-date.

What Happened?

John Lett was given a $120,000 life insurance by his employer. He named his wife Nancy as his beneficiary. The couple then got a divorce and the divorce judgment contained the customary language cancelling each spouse’s interest in the other one’s life insurance policies. After the divorce, John removed Nancy as his beneficiary.

However, the divorce judgment also required John to pay the home equity line of credit which was a joint debt. In order to make sure he paid the debt, the divorce judgment required John to buy a separate life insurance policy for at least $28,000 and name Nancy as a beneficiary. John did not buy the new life insurance policy, but instead re-named Nancy as the 100% beneficiary on the $120,000 life insurance policy from his employer. When John paid off the home equity loan, he did NOT remove Nancy as the beneficiary of his life insurance.

John died 2 years later and the executor of his estate asked the Court to rule that Nancy was not the beneficiary of the life insurance. The Probate Court agreed that Nancy was not the beneficiary, but the Court of Appeals disagreed. The Court of Appeals noted that the divorce judgment cancelled only the interest that Nancy had in the life insurance policy on the date of the divorce. However, after the divorce, John filled out a NEW beneficiary form that named Nancy.

How Did the Court Rule?

John’s Personal Representative pointed out to the Court that John re-named Nancy because of the home equity loan, but the Court was not persuaded. The court noted that John was obligated only to name Nancy on a $28,000 life insurance policy, but that instead he named her the 100% beneficiary of a $120,000 policy. In addition, he did not name any contingent beneficiaries. Finally, he did not remove Nancy again in the two years after he paid off the home equity loan. So, the Court reversed the Probate Court ruling and ordered that the life insurance proceeds be paid to Nancy.

Was it possible that John simply forgot to remove Nancy after he paid off the home equity loan? Yes, it’s possible, but the Court is required to look at the actual actions that John took, not what have might been in his head at the time of this death. The only way John could make his decision clear was to change the beneficiary form. Since that had not been done, the beneficiary designation was enforced.

Do you have questions about this or other estate planning matters? Contact us for a FREE consultation.