A recent case by the Tennessee Court of Appeals highlights the importance of changing one’s insurance and retirement policy beneficiaries after divorce. This is true no matter what the divorce documents say and no matter what any order signed by a Judge says.
But let’s start out with the basics. In Tennessee, as in many other jurisdictions, once a divorce case begins, a set of rules comes with it, per the law. Here, they are called the Statutory Injunctions.
Under T.C.A. 36-4-106(d), once a divorce begins, an injunction springs into existence. It restrains and enjoins both parties from dissipating marital assets, destroying evidence, and harassing or assaulting the opposite party, among other things. Those other things cover altering the financial norms without court permission. This includes not cancelling insurance policies or changing the insurance policy beneficiaries, as a general rule.
The above means that during a divorce, neither party should remove their spouse as a beneficiary of a retirement plan or of a life insurance policy without Court permission. Unfortunately, sometimes parties to a divorce forget that after the divorce is over and those rules are gone, changing beneficiaries is one of the first things an ex-spouse should consider doing.
A recent case on point is Estate of Birdwell v. O’Dell. In this case, Mr. Birdwell and Ms. O’Dell were divorced by Court Order in 2015. At the time, Mr. Birdwell had an employment-related retirement account, which was vested, and his Ex-Wife had been designated as its beneficiary. Mr. Birdwell wanted this to no longer be the case after his divorce.
The Final Divorce Decree addressed this issue. The court order specifically said each Party would receive and retain their own separate savings, checking, and retirement accounts, as well as any other accounts currently maintained in their own name, post-divorce. The court order also required each Party to execute all documents needed by the opposite party, or otherwise, to effectuate its intentions.
Six years after the divorce, now in ill health it appears, Mr. Birdwell reviewed his financial state of affairs and realized he failed to remove his Ex-Wife as the beneficiary of his retirement account. Mr. Birdwell promptly executed a Power of Attorney (POA). In the POA, Mr. Birdwell instructed the beneficiary designation on his retirement account be changed from his Ex-Wife to his Estate, among other things.
Mr. Birdwell was physically ill at the time, but mentally competent. An Attorney-in-Fact (AIF) was appointed by Mr. Birdwell to execute his wishes via the POA. The AIF was instructed to remove Mr. Birdwell’s Ex-Wife, so she was no longer a beneficiary of his retirement account, and to replace her with his Estate. This allowed Mr. Birdwell to control where his retirement proceeds would go, via his will, when he passed away.
The AIF documented his efforts to change the beneficiary designation on Mr. Birdwell’s retirement account, from his Ex-Wife to his Estate. Despite multiple attempts, however, the company maintaining the retirement account refused to change the beneficiary designation, due to some technical discrepancies about language in the Attorney-in-Fact documentation.
Mr. Birdwell also left a will. His Ex-Wife was not a beneficiary under his will in any fashion, either. Meanwhile, however, the Ex-Wife remained the sole named beneficiary on Mr. Birdwell’s retirement account as of the date of his death, at which point the retirement account beneficiary issue between the AIF and the insurance company remained unresolved.
Due to this fact, following Mr. Birdwell’s death, the retirement account company sent correspondence to his Ex-Wife in which it requested documents in order to begin the process of “transferring the benefits of the retirement account to her.” The amount at issue was $269,851.64.
The beneficiaries of Mr. Birdwell’s Estate objected. They pointed to the clear language from his divorce order which was in effect for over half a decade when Mr. Birdwell died. The Divorce Decree said each Party had no interest in the opposite Parties’ retirement account at all. They also pointed out the fact that Mr. Birdwell created an Attorney-in-Fact for himself before he died, and he gave specific and plain instructions to the Attorney-in-Fact to remove his Ex-Wife in all capacities from his retirement account as a beneficiary of it. The Estate beneficiaries also showed written documentation from the AIF to the insurance company confirming this. Thus, the Estate said the divorce documents stripped the Ex-Wife of any rights to Mr. Birdwell’s retirement proceeds, and that Mr. Birdwell made his intentions clear—in writing and via properly executed legal documents—shortly before he died, indicating he did not want his Ex-Wife to receive them.
In the interim, the insurance company sent the entire retirement account proceeds to the Ex-Wife, as she was the only listed beneficiary at the time of Mr. Birdwell’s death. The Personal Representative of the Ex-Wife refused to return the proceeds to the Estate.
The Estate sued, asserting breach of contract, unjust enrichment, and conversion, (i.e. the wrongful taking of property). The Estate said the Ex-Wife’s acceptance of the retirement proceeds was a “failure to perform her obligations” under the Parties’ divorce and the plain language of the Parties’ Divorce Decree, in which she was “completely divested of all interests in the [retirement] account.” The Estate pointed out that the Ex-Wife was required to “take all action necessary to effectuate that divestment” in the Divorce Decree entered by a judge, to which she was both a party and a signatory. The Estate sought return of the entire $269,851.64.
In the ensuing litigation, the Ex-Wife did not agree with the Estate’s position. She contended the Divorce Decree only divested her of any marital interests she held in the retirement account. Ex-Wife asserted the beneficiary designation on the retirement account itself was not a marital interest. Instead, she said it was a separate contract which survived the divorce. Her Ex-Husband was free to leave his retirement benefits to anyone he desired post-divorce, she posited, and the retirement contract said he was to make his desires known by its beneficiary designation. The Ex-Wife was the only listed retirement account beneficiary at the time of Mr. Birdwell’s death, and so she was the contractual beneficiary, without regards to the divorce or its mandates, she said.
Ex-Wife argued this means the divorce agreement did not impact her capacity to be designated as a beneficiary of her Ex-Husband’s retirement account, post-divorce. Ex-Wife also asserted a change to the beneficiary designation was never an express or intended term of the divorce agreement, and since Mr. Birdwell failed to effectuate a change in the beneficiary designation before his death, the retirement account contractual terms control. This means Ex-Wife is therefore entitled to all of the retirement account payouts, she asserted.
In support of this position, Ex-Wife said she was never asked to sign any documents which would change the retirement account beneficiary. Ex-Wife took the position she “fully performed the terms” of the Court Order and that she “did not breach it.” Ex-Wife concluded she “lawfully received” the funds as the properly named beneficiary on the account.
The Estate conceded that when it comes to life insurance and annuity cases, a Divorce Decree does not change the beneficiary designations in those contractual products. But it argued that in this matter, the Parties’ specific divorce language said neither Party would have any interest in the opposite Party’s retirement account. The Estate maintained that the Parties’ intent in the divorce documents was very clear, “notwithstanding legal jargon.” This intent was for Ex-Wife, “to receive no benefit from the retirement account.”
The Estate also clarified it was not taking the position that Ex-Wife needed to execute any documents to remove her from the retirement account. Instead, the Estate only demanded that the Ex-Wife not execute documents that “enabled her to receive funds that did not belong to her.” It concluded that the Ex-Wife submitted paperwork necessary to receive retirement funds specifically prohibited to her under the plain language of the Parties’ Divorce Decree.
The trial court agreed with the Estate. The court found the language in the Divorce Decree was clear: Ex-Wife had no interest in Ex-Husband’s retirement account, Ex-Husband tried to take the Ex-Wife off of the retirement account and then died during that process, and therefore his intention was clear. The intention of Ex-Husband was he did not want his Ex-Wife to be the beneficiary of his retirement account. Instead, Ex-Husband intended his Estate to be the sole beneficiary of his retirement account, and the trial court entered an order accordingly.
Ex-Wife appealed. The appellate court took up the case—and overturned the trial court. The appellate court said it is “well-settled law in Tennessee that the designation of beneficiaries on life insurance policies and annuity agreements are matters of contract between the participant and the company or organization issuing the policy of life insurance or funding the annuity agreement.”
The appellate court said this same logic applies to a retirement account. It found that while the Parties may have intended at the time of the divorce for each Party to own their own respective retirement accounts, the law is settled in Tennessee that a Marital Dissolution Agreement (Divorce Decree) does not revoke a prior beneficiary designation in another insurance or annuity contract. The appellate court said there was no practical difference between such death benefits and a death benefit in a retirement plan, either.
The appellate court also addressed whether the statements in the Parties’ Divorce Decree applied to instructions about future actions. The court pointed out that the Parties’ divorce documents had no future obligations in them. Instead, the Divorce Decree simply said each Party would “receive their own” retirement accounts. This meant Mr. Birdwell’s retirement account would be his “sole and absolute property” after the Parties’ divorce. And it was.
The Tennessee Court of Appeals went further. It said that even future obligations placed in a Divorce Decree may not actually control future behavior. The Court held, in essence, that the Divorce Decree gave to each Party their own accounts and kept the opposite Party from making future claims to the other’s property. This left beneficiary designations controlled by the contract in effect as to any of the Parties’ retirement plans.
In this case, no action by Ex-Wife created her rights in her Ex-Husband’s retirement account. Instead, it was action—or perhaps better stated inaction—by Ex- Husband which created and gave to Ex-Wife the contractual beneficiary rights she had as to his retirement account proceeds at the time of his death.
In short, the Tennessee Court of Appeals found in favor of Ex-Wife. The appellate court found the language in the Marital Dissolution Agreement about each Party retaining their own retirement accounts was a “distinction without a difference” when it came to the reason Ex-Wife is entitled to receive Ex-Husband’s retirement account benefits. The reason is that Ex-Husband’s retirement account contract with his retirement plan controls, and it said whoever was listed as the retirement account beneficiary at the time of his death was just that, and entitled to the retirement account proceeds under the plain contract mandates.
Conclusion
What is in Divorce Decrees is extremely important. It is the law of the case between two Parties, and violating a Divorce Decree can be contempt of court.
It is a mistake, however, to read Divorce Decrees too broadly when it comes to rights an ex-spouse may have otherwise, including contractually, against the opposite Party. Always carefully review all insurance policies and retirement plans, as well as other items of value with remainder interests, immediately after a divorce. Look carefully at who the beneficiaries are, and make sure they are exactly who you want them to be. Failure to do this may result in a significant windfall in the form of a large, and undesired, financial payment to an ex-spouse long after the Parties are divorced.
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About the Author:
Stuart Scott
Stuart is a litigation attorney with over 30 years of experience. He has tried hundreds of cases in both state and federal court. Some of his noteworthy victories have been featured in local, state and national publications. Stuart is also listed as a Supreme Court Rule 31 Family Law Mediator. Stuart focuses his primary area of practice on family law. He represents people going through divorce and focuses his efforts on providing his legal services and advice to his clients in this area. Mr. Scott may be reached in our Nashville office at 615-620-1710 or [email protected].