Pay on Death Provisions; Life Insurance, ERISA, Constructive Trusts

Pay on Death Provisions; Life Insurance, ERISA, Constructive Trusts
Pay on death provisions are arrangements between a bank or credit union and an account holder who has designated specific beneficiaries to receive some or all of the account holder’s assets in the bank or credit union. The immediate transfer of the assets is triggered by the death of the account holder. Pay on death provisions may be in effect for a person’s checking account, savings account, security deposits, savings bonds and other deposit certificates.
Pay on death provisions may be useful to secure payment for the recipient spouse, but are not secure since the account owner (obligor) retains control of the asset, the ability to spend the funds, and the ability to change the pay on death designation at will.
It is important for the attorney to remind the client after the divorce is final to review all of his or her assets and to change any pay on death provisions which may have been established during the marriage, since the bank or credit union must release the funds to the named beneficiary on death of the account owner.
Life insurance is possibly the most efficient and effective way to secure payment of support obligations and property settlement debts assumed by the obligor spouse, in the event of his or her death before the obligations are satisfied, provided certain safeguards are in place. The parties must first determine whether private insurance will be used to secure payment, or if an employer funded plan will be used.
Both parties should refrain from changing the beneficiary designations of their life insurance policies (assuming they have already named each other as primary beneficiaries) during the settlement negotiations.
The amount of the obligation to be paid should be clearly stated in the settlement agreement or judgment of divorce. The judgment or settlement agreement should describe the terms under which the obligation is determined to be satisfied, thus allowing the obligor spouse to change the beneficiary designation of the policy when he or she has paid the amount of the obligation.
The judgment or settlement agreement should state that any proceeds from the life insurance policy in excess of the outstanding support obligation/property settlement obligations at the time of death will revert to the decedent’s estate (effectively creating a constructive trust in the recipient spouse for the proceeds in excess of the debt).
If an employer paid insurance policy is used to secure the obligations, the recipient spouse may bargain for a provision that a privately owned policy will be purchased, if possible, should employment or the employer-funded insurance benefit terminate.
Use care in drafting and confirming compliance with the agreement if the life insurance is provided as part of a package of qualified employments benefits under the Employees Retirement Income Security Act of 1974 (ERISA). Federal law controls over state law in this area, according to the Sixth Circuit Court of Appeals. In this circumstance, the beneficiary may only be named in compliance with the plan’s internal procedures. The beneficiary’s attorney should ensure the obligor spouse completes all the benefit plan’s beneficiary forms correctly post-judgment in order to maintain coverage. The attorneys should obtain descriptions of the plans while gathering information during the discovery period in settlement negotiations.
A word of caution to the attorney representing the insured spouse when life insurance is not being used to secure support or debt obligations. It is important that the insured client is advised to change the beneficiary designations on his or her policy after entry of the judgment, since the insurance provider will disburse the proceeds according to the beneficiary designation. This may lead to expensive litigation between a former spouse and the decedent’s current heirs.
ERISA (Employees Retirement Income Security Act of 1974) is the federal law that sets the minimum standards for pension plans in private industry. ERISA requires that any employer who establishes a pension plan meet certain minimum standards. The general rule is that, except in certain limited circumstances, qualified retirement plans must provide benefits which cannot be assigned to others. ERISA contains an express state law preemption provision, which establishes private pension plan regulation as exclusively federal. Due to concern about the effect of the preemption provision on the division of retirement plan benefits in state court divorce actions, Congress passed the Retirement Equity Act of 1984 (REA), which established qualified domestic relations orders (QDROs) as exceptions to the anti-assignment provisions of ERISA .
If a state court domestic relations order is qualified, the plan administrator must honor its’ terms. QDROs may be used to divide retirement benefits, pay support obligations or secure property settlement payments. These rules apply to:
private employer tax-qualified pension plans
profit-sharing plans
stock bonus plans
defined benefit plans
401(k) plans
money purchase pension plans; and
employee stock ownership plans (ESOPs)
They do not apply to governmental plans or most church plans. However, state and local government retirement plans in Michigan are subject to anti-assignment rules under the Public Employee Retirement Benefit Protection Act (PERBPA) MCL 38.1681 et seq. It includes a specific exception to allow division of benefits in divorce actions. Eligible Domestic Relations Orders (EDROs) are used to divide these plan benefits. It allows an alternate payee to be considered a surviving spouse for purposes of the plan’s preretirement and post retirement survivor benefits, if the alternate payee is designated as the surviving spouse in the EDRO.
If the EDRO states the alternate payee is guaranteed payment of his or her portion of the preretirement survivor benefits, the alternate payee is guaranteed to receive the payment even if the plan participant (obligor) dies before the alternate has begun to receive payments.
If the obligor predeceases the alternate payee after the payments to the alternate payee have begun, in a defined benefit plan, and the alternate payee receives the benefit in the form of a life annuity based on the alternate payee’s life, the alternate payee’s benefit is not affected at all by the participant’s death. But, if the alternate payee’s benefit is in the form of an annuity based on the participant’s life, the benefit terminates when the participant dies.
In order to insure the alternate payee receives payments for his or her lifetime, if that is the intent, the alternate payee must select a life annuity based on his or her own life, or a joint and survivor annuity benefit, with the alternate payee as the surviving spouse.
Under the EDRO act, if the alternate payee dies before he or she has begun to receive benefits, the alternate payee’s benefit reverts to the plan participant, if the benefits are in a defined benefit plan.
For purposes of this discussion, we assume the parties have chosen the deferred division method to award the retirement assets to the parties. The non participant spouse (the alternate payee) will receive the share awarded to him or her directly from the plan. We are concerned with securing the awarded benefit on death of either of the parties. It is imperative that the practitioner who is negotiating for a portion of retirement benefits as part of a property settlement obtain a copy of the plan’s Summary Plan Description, which will include the plan’s rules for obtaining distribution and the guidelines for dividing the plan assets with a divorcing spouse.
Pursuant to MCL 552.101(4), each divorce judgment must include a provision which determines all the rights, including the continent rights the spouses have in any vested pension, annuity or retirement benefits; any accumulated contributions in any pension, annuity or retirement system and any unvested pension, annuity or retirement benefits.
Until the domestic relations order is entered by the court and accepted as a “qualified” domestic relations order by the plan administrator, there is concern the alternate payee is not entitled to any benefits under the retirement plan. The practitioner must draft the judgment with concern for the consequences if the plan participant dies, retires or terminates employment prior to entry and acceptance of the QDRO.
Dept. of Labor regulations, effective April 6, 2007 have provided some guidance, stating a Domestic Relations Order does not fail solely because it is issued after the participant’s death. They also allow an alternate payee to be designated in a QDRO as a surviving spouse, even after a divorce is final.
It is imperative the divorce judgment states clearly the parties intent that the death of the participant prior to entry of the domestic relations order, or prior to submission and acceptance of the order by the plan, should not prevent acceptance of the order or designation of the alternate payee as the recipient of the benefits awarded in the property settlement and divorce judgment. It is best practice to notify the plan administrator that an order to award benefits to an alternate payee is being prepared for submission. You may request the plan administrator to place a “hold” on the account, preventing its disbursement until the DRO is received and qualified. WWW.ATTORNEYBANKERT.COM