Understanding Life Insurance & Retirement Account Distributions

Dear Len & Rosie,

A friend of mine had been married for about one year. Her husband just died tragically. At the time of his passing, he had not yet changed the beneficiary on his life insurance policy to his wife. His parents are still named as the beneficiary. Does the surviving wife have any claim on the life insurance, or is she out of luck? It’s certain that some of premium payments would have been paid with community property funds.

Randy

Dear Randy,

As a rule of thumb, when you get married or register as a domestic partner with the California Secretary of State, or if you get divorced, it’s time to take a look at all of your estate planning documents, including pension and life insurance policy beneficiary designations.

It’s also important to understand that it doesn’t matter what your will or trust says about your life insurance and retirement accounts. These accounts will pass to their designated beneficiaries no matter what the estate plan says. If you want to change who gets your insurance or retirement accounts upon your death, the only way to do it is by filing out new beneficiary forms obtained from the insurance company or retirement account custodian.

Your friend’s rights depend on what kind of insurance her husband held, and when the policy premiums were paid. If he owned a fully paid up whole life policy, and didn’t make any policy payments during the marriage, then your friend has no rights at all. The policy was her husband’s sole and separate property. The same applies if her husband paid the policy premiums from separate property assets, such as inherited or gifted money, or money he already had prior to the marriage.

However, if he paid the policy premiums out of his earnings, and there’s no pre-nuptial agreement saying his earnings are separate property, then he used community property half owned by his wife to pay for his insurance. Under California law, a spouse cannot give away community property without the consent of both spouses. So, your friend would have a claim on part of the life insurance.

If the policy is a term life policy with no cash surrender value, then she should be entitled to a full half of the proceeds of the insurance. If, however, the insurance is a whole life policy that is part insurance, part investment, then she won’t get half. She’ll be entitled to only half of the portion of the policy purchased with community property.

She should contact the life insurance company. They’ll put a hold on distributing the policy so that she and her husband’s parents can work it out. If they can’t, the life insurance company will likely surrender the policy to the court in a legal procedure called “interpleader” and allow your friend and her in-laws to fight over the policy in court without the insurance company’s further involvement.

Len & Rosie

Intestate Succession

Dear Len & Rosie,

My mother passed away last May without a will. My stepfather is in the hospital right now with only days left to live, again without a will. I do not have a power of attorney. My step-father’s physician at the hospital wrote a letter stating that my step-father is unable to make decisions and has a terminal disease. How do I get conservatorship or anything related so that I can handle his affairs? There isn’t much but what there is I would like to take care of.

Tracey

Dear Tracey:

It’s important to have an estate plan. This may be a particularly hard lesson for you, because your step-father is at least partially incapacitated and probably cannot give you a power of attorney or make a will to properly dispose of his estate. This lesson is more for other readers of this column.

As a minimum, all of you should have a durable power of attorney and an advance health care directive, so that trusted family members or loved ones can manage your finances, pay your bills, and make important medical decisions in case you become incapacitated. You should also have a will to spell out how your estate is to be distributed after your death, or, better yet, a revocable trust to avoid probate if you own more than $150,000 in assets. Tracey is looking at the prospect of filing for a conservatorship over her step-father because he didn’t have a durable power of attorney. Don’t let this happen to you.

Tracey, you probably do not need a conservatorship. If your step-father has only a few days to live, his bills will wait until his death when you can be appointed as the administrator of his estate by the probate court. The only reason you would need to be appointed as conservator now is if his medical care providers need some to make decisions regarding his immediate medical treatment. In this case, you would become the conservator of your step-father’s person (his health care decisions), as opposed to his estate (his assets).

Normally it takes at least a month to be appointed as conservator, because the law requires that thirty days notice of a conservatorship petition be provided to the proposed conservatee and his or her immediate relatives. You can however file an emergency petition with the court to appoint you as the temporary conservator of your step-father’s person, pending the court hearing a month from now. If it is absolutely necessary, you can be appointed as your step-father’s conservator within a day or two. Go see an elder law attorney immediately.

Because neither your mother or step-father made wills, upon your step-father’s death, his estate will be divided into two portions. Everything your step-father inherited as a result of your mother’s death will pass to you and any other of your mother’s children. The assets your step-father owned prior to your mother’s death will pass to his own surviving family members by intestate succession.

Len & Rosie