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Warning - Your Ex-Spouse May Inherit Your Life Insurance!

6a017d3e6b2617970c01901d7d77f8970b-320wi.jpgWhen Warren Hillman died in 2008 at the age of 66, his assets included a life insurance policy worth $124,558.03. For the past five years his ex-wife and his widow have been fighting over that money. [On June 3, 2013] the U.S. Supreme Court found that Judy Maretta, who Hillman divorced 10 years before he died, was entitled to every penny of it.

Few means of planning for the distribution of your assets are quite as useful, or quite as disastrous, as the simple beneficiary form. There is nothing simple about it. While an up-to-date beneficiary form bypasses ambiguity and probate, and often taxation besides, an out-of-date beneficiary form simply invites controversy and anguish.

A very recent case on beneficiary forms and disaster went all the way to the Supreme Court in Hillman v. Maretta, and it's quite instructive. The case is considered in a recent Forbes article titled [spoiler alert] "Supreme Court Favors Ex-Wife Over Widow In Battle For Life Insurance Proceeds."

You see, Warren Hillman left a life insurance policy behind amongst his other assets. Much of the estate simply passed to his then-current wife. Unfortunately for the current Mrs. Hillman, the life insurance policy was subject to a beneficiary designation form that still named his previous Mrs. Hillman, Judy Maretta. Judy and Warren had been divorced for some 10 years.

Despite the pleas of the current Mrs. Hillman, the court had to do it: they gave it all - every penny - to the ex-wife named as beneficiary.

Unlike a retirement account, the singular purpose of a life insurance policy is to provide financial protection to those depending on your life and income. This would seem to exclude a 10 years divorced spouse, absent an alimony requirement in the divorce decree.

Bottom line: the beneficiary form is a matter of contract between the policy owner and the insurance company. The courts can do nothing but enforce that contract.

Are your beneficiary forms ready to be followed to the letter? How will the rest of your estate keep out of the court system?

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