[WSBAPT] Life Insurance Proceeds Subject to Decedent's Debts?

Tue Jan 18 08:13:26 PST 2022

This article might be helpful – See RCW 11.07.010.  There are exceptions.  This article appeared in the Winter 2010 edition of the Washington State Bar Association Real Property, Probate and Trust Section Newsletter
WHO RECEIVES THE PROCEEDS OF LIFE INSURANCE.  As to question of insolvency, generally “beneficiaries” of life insurance proceeds are not liable for the decedent’s debts, including those of his probate creditors. RCW 48.18.410.

Non-probate assets, if given to a specific individual, are considered specific bequests for purposes of abatement.  RCW 11.10.040(2)(a).   “Beneficiaries” of life insurance proceeds are not liable for the decedent’s debts, including those of his probate creditors.  RCW 48.18.410.   You will need to research whether the Estate is a “beneficiary” of the life insurance proceeds and included in the exception.

Also, the life insurance monies were NOT subject to satisfaction of decedent’s liability immediately prior to the death – there is no asset (life insurance $) until the decedent dies.

________________________________
RCW 11.18.200<http://app.leg.wa.gov/RCW/default.aspx?cite=11.18.200>
Liability of beneficiary of nonprobate asset—Abatement.
(1) Unless expressly exempted by statute, a beneficiary of a nonprobate asset that was subject to satisfaction of the decedent's general liabilities immediately before the decedent's death takes the asset subject to liabilities, claims, estate taxes, …

Make sure you do your due diligence and review these decisions for updates since 2010.
See http://www.stokeslaw.com/uploads/pdf/rppt-winter-2010-ep8.pdf

Automatic Revocation Upon the Dissolution of a Marriage or a Registered Domestic Partnership

If the insured failed to revise his beneficiary designation after a divorce or dissolution of a domestic partnership and the former spouse or domestic partner is still named as beneficiary under the policy, RCW 11.07.010(2)(a) automatically revokes the designation of the former spouse or domestic partner as beneficiary of the policy.  The statute creates a legal fiction that the former spouse or domestic partner has predeceased the insured, the former spouse or domestic partner “having died at the time of entry of the decree of dissolution.”28  In that case, any contingent beneficiaries named under the policy would be entitled to the insurance proceeds, or the proceeds would be paid to the insured’s estate.
Policies Underlying the Automatic Revocation on Dissolution Statute

The legislature enacted the automatic revocation statute in response to the Washington State Supreme Court’s decision in Aetna Life Insurance Co. v. Wadsworth.  Practitioners heavily criticized that decision because it concluded that an insured’s designation of his former spouse as a beneficiary under his insurance policy was valid even though the divorce decree had specifically purported to divest the former spouse of an interest in the policy.  The court adopted this “Wadsworth rule” to “encourage individuals to carefully consider the disposition of life insurance policies in dissolution” and to “simplify the procedure of determining to whom life insurance proceeds are to be distributed.” In response, the legislature enacted the automatic revocation statute premised on the assumption that members of divorced marriages or dissolved domestic partnerships would want to change the beneficiary designations on their insurance policies.  As later explained by the court in Mearns v. Scharbach:31

The Legislature sought to accomplish several purposes [by enacting RCW 11.07.010].  First, the Legislature codified the assumption that divorcing couples want to change the beneficiary designations on nonprobate assets upon dissolution or invalidity of their marriage.  Of equal importance, the Legislature chose to accomplish this goal by adopting an automatic revocation mechanism patterned after the revocation provisions applicable to wills.  By choosing this mechanism, the legislators demonstrated their understanding that life insurance and other nonprobate assets are widely used as essential parts of estate planning and should be treated accordingly.  Additionally, the adoption of a bright-line rule triggered by the date of dissolution or invalidation of marriage evinces a legislative intent to encourage couples to resolve estate planning questions when terminating their marital relationship.

Exceptions to the Automatic Revocation on Dissolution Statute

There are exceptions to the exception, however.  First, the statute does not apply if the decree of dissolution of the marriage or the registered domestic partnership requires that the insured maintain the former spouse or former domestic partner as the beneficiary of the policy.33  Second, the statute does not apply if the insured voluntarily redesignates the former spouse or former domestic partner as the beneficiary after the date of dissolution.  In Mearns, the court held that a redesignation of the former spouse as the beneficiary of the insurance policy following dissolution of the marriage must be in writing to overcome the operation of the automatic revocation statute.

Third, federal ERISA preempts the automatic revocation statute.  In Egelhoff v. Egelhoff ex rel. Breiner,35 the employer provided life insurance benefits.  Two months after the insured obtained a divorce from his second wife, he died.  The policy named the second wife as the beneficiary.  The children of the first marriage sued asserting that the beneficiary designation was automatically revoked by RCW 11.07.010(2)(a).  The U.S. Supreme Court, however, held that Washington’s automatic revocation provision was preempted by ERISA.36   A recent Pennsylvania case has added a twist to ERISA preemption.  The court in Pennsylvania held that the remedy provided by the revocation on divorce statute was not preempted by ERISA.37  The insured and his wife were divorced.  The insured never changed the designation of his ex-wife as beneficiary of the life insurance policy that was part of his employee benefits subject to ERISA.  After the insurance company paid the proceeds of the policy to the ex-wife, the administrator of the estate brought an action to require the ex-wife to surrender the proceeds to the contingent beneficiary under the policy.  The appellate court affirmed because the Pennsylvania revocation on divorce statute makes the ex-spouse answerable to anyone prejudiced by the payment and because it does not impact the administration of the ERISA plan so it is not preempted.

Fourth, the automatic revocation statute does not apply to foreign divorce decrees.  In Henley v. Henley,39 the insured named his second wife as beneficiary of his life insurance policies.  Later they obtained a divorce in Hong Kong and the insured never changed the beneficiary designation.  After the divorce, the insured moved to Washington where he lived at the time of his death.  The children of the prior marriage sued for the proceeds of the insurance policy.  The Washington State Supreme Court held that the automatic revocation statute is limited to decrees of dissolution entered by the superior courts of the State of Washington.

Exception No. 5:  The Equitable Vesting Doctrine for the Support of Minor Children

Planning that involves divorced parents or parents of a dissolved domestic partnership and minor children raises special considerations because Washington law recognizes a narrow exception to the general rule that an insured’s designation of a beneficiary will generally be upheld.  Under Washington law, where a divorce decree or dissolution of domestic partnership agreement requires the insured to maintain life insurance as security for his or her obligation to provide support for minor children and adequately identifies the policy, the children will have an equitable interest in the proceeds of the policy even if the insured later changes the beneficiary before his or her support obligations expire.41  In Aetna Life Ins. Co. v. Bunt,42 the Supreme Court recognized this narrow exception of equitable vesting.43  In Bunt, the final decree of dissolution incorporated a separation agreement whereby the insured agreed to pay child support.  The decree also ordered the insured to name the parties’ two minor children as irrevocable beneficiaries of his life insurance policy.  The insured remarried and, contrary to the express order of the court, changed the beneficiary designation to his second wife.  The insured died and the minor children and the second wife both claimed entitlement to the proceeds.  The Supreme Court held that the children acquired an equitable interest in the proceeds of the life insurance policy and invalidated the insured’s change of beneficiary.

When Used as Security for the Support for Minor Children

Under Washington law, equitable vesting applies only when the insurance is used to secure an obligation of support for minor children, and the insured has died while the children are still minors.45  Bunt recognized that a divorce can raise special concerns about the financial support of children and that it is the policy of the State of Washington to protect children in divorce proceedings.46  Providing equitable vesting when life insurance is used to secure support obligations for minor children is consistent with the protections that Washington courts afford minor children of divorced parents.47  Where a life insurance policy is used as security for child support, equity favors the children to preclude the insured’s right to change beneficiaries.  Washington courts have upheld security for support provisions as long as the father’s obligation to maintain his children as beneficiaries on his life insurance ceases when his support obligation ceases.

So Long as the Policy is “Adequately Identified”

The application of the equitable vesting doctrine turns on whether or not the divorce decree adequately identified the insurance policy.  A divorce decree will not encumber a particular life insurance policy under the equitable vesting doctrine unless it adequately identifies it.49  In Bunt, for example, the dissolution decree specifically identified the policy, and the court held that the minor children were equitably vested in the proceeds of that policy.50  The decree in Bunt stated that the insured would “name their two minor children as irrevocable beneficiaries of the Aetna life insurance policy available to [him] as a Boeing employee.”51  At the time that the insured died, he had changed the beneficiary designation of that policy to his second wife.   In Sullivan v. Aetna Life & Cas.,52 on the other hand, the decree of dissolution did not refer to the specific policy at issue and the court declined in that case to extend the principle of equitable vesting recognized in Bunt.  The decree in Sullivan stated only that “[e]ach party shall maintain a minimum of $10,000 life insurance with their minor child as beneficiary until said child attains majority.”53  As a result, the children did not have a superior right to the named beneficiary, but instead the beneficiary provision controlled.   In In re Marriage of Sager,54 the decree was more specific than the decree in Sullivan, but less specific than the decree in Bunt.  Like Bunt, it said the insured was to maintain life insurance that existed through his employment for the benefit of his minor children, but like Sullivan it did not identify the employer or the insurer.  The court of appeals nevertheless held that it adequately identified the policy that existed through the insured’s employment.  The court in Sager upheld the minor children’s right to equitably vest in the policy the insured had through his employer at the time he died.

Open Questions About the Equitable Vesting Doctrine

While the equitable vesting doctrine is the law of Washington, it may be applied differently in other states.  Still, given the relatively few decisions in Washington about the doctrine, a number of questions remain:  What if the divorce decree requires the insured to name the first wife as the irrevocable beneficiary, instead of the minor children, does the doctrine still apply?  What if the insured did not change the named beneficiaries, but instead the policy in the decree lapsed due to nonpayment of the premiums?

Dalynne Singleton
Gourley Law Group
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The Exchange Connection
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From: wsbapt-bounces at lists.wsbarppt.com <wsbapt-bounces at lists.wsbarppt.com> On Behalf Of Stromberg, Spencer
Sent: Monday, January 17, 2022 5:16 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com>
Subject: [WSBAPT] Life Insurance Proceeds Subject to Decedent's Debts?

Hello listmates -

I'd appreciate anyone's insight on the following situation regarding a probate question.

Background:

  *   Decedent was divorced.
  *   Decedent had a life insurance policy listing former spouse as beneficiary with no alternate beneficiary named.
  *   Adult Child of Decedent was told by the insurance company that they needed to present letters testamentary to claim the proceeds of the life insurance policy.
  *   Adult Child opened probate and a creditor of Decedent submitted a claim.
  *   Insurer paid the policy proceeds to Adult Child.
Clearly, the former spouse is treated as having predeceased Decedent (RCW 11.07.010).

  1.  Does RCW 48.18.410 make the proceeds of the life insurance policy exempt from Decedent's debts? It certainly seems to, as Adult Child is a "payee" if not a "lawful beneficiary" of the policy.
  2.  Does it depend on the existence of a "facility-of-payment" clause under .410(4)?
  3.  Are the proceeds not an asset of the estate? This seems to be the logical result if they were payable to the heirs directly.
  4.  If the proceeds are not subject to the debts of Decedent and there are no other assets in the estate, the estate is insolvent, right?
Thanks in advance.

Spencer A. W. Stromberg
Attorney at Law
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