April 14, 2016

How Matrimonial Law Intersects with Estate Planning

Holland & Knight Private Wealth Services Blog
John D. Dadakis | Karen Eng

The intersections of matrimonial law and estate law sometimes are fraught with the same wackiness as the traffic intersection in Ethiopia’s Meskel Square. A Montana Supreme Court case, Volk v. Goeser, highlights a recent debacle involving life insurance proceeds. (There is many a case where this intersection of matrimonial law and estate law involves life insurance proceeds).

The facts of the case were simple. At the time of his divorce proceeding Roy Volk owned two term life insurance policies with his then spouse, Pamela Volk, named as sole beneficiary of a $1.0 million policy, and a one-half beneficiary of a $1.5 million policy, with his estate named as secondary beneficiary. Upon the filing of the divorce proceeding on June 25, 2010, the Montana District Court issued an order restraining transfer of any assets by either spouse (under Montana law that included making any beneficiary changes on life insurance policies as well as other similar forms of beneficiary designations). Twenty days after the order was entered Roy changed the beneficiary on both policies to his sister. Roy and Pamela finalized their divorce on December 20, 2011, whereby Roy agreed to execute a Will “giving all of his assets to his son.” While neither of the life insurance policies were specifically mentioned in the terms of the settlement, the $1.0 million policy was listed as an asset of Roy’s (but not the $1.5 million policy). Sadly Roy passed away less than five months after the divorce was final. Without notifying Pamela, Roy’s sister collected the life insurance proceeds, and used them to buy herself a home in California, notwithstanding that Pamela had advised her that she believed her son had an equitable claim to the proceeds.

Pamela sought to recover the insurance proceeds through a probate proceeding filed in October, 2012. Two years later the District Court issued a summary judgment in favor of Roy’s sister on the grounds that since, after the divorce Roy would have been able to change the beneficiary, there was “no foul” with designating his sister as beneficiary of the policies, notwithstanding that had Roy not violated the restraining order, leaving Pamela as a designated beneficiary, by operations of law the proceeds would have passed to Roy's estate, thereby passing to Pamela’s son and a daughter from another mother.

On March 8, 2016, the Montana Supreme Court reversed (with one dissent) the lower court decision finding that Roy's sister was unjustly enriched and that a constructive trust "was created on [Pamela's son's] behalf" due to Roy's "changing the beneficiary of his life insurance under the statutorily-mandated restraining order,” invalidating the beneficiary change forms signed in July, 2010. The court remanded the case to the lower court to determine the amount by which Roy's sister was "unjustly enriched". In essence after four years of litigation, the person for whom the divorce settlement was to benefit is still without the funds. (An interesting aside is that Roy also had a daughter whose mother and he had agreed, in a child support proceeding, that Roy would purchase a $100,000 life insurance policy on his life for that daughter; Roy never did purchase the policy and a claim was also made under that agreement).

Divorce is always fraught with emotion as is estate administration. When divorce settlements impact estate planning issues, the individuals and their attorneys would be wise to consult with attorneys versed in the estate area. As the saying goes "a stitch in time saves nine" or as their case shows, not only time, but significant expense and heartache.

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