Life insurance can help disinherit spouse, so changes are needed

Staying Ahead

November 20, 1995|By JANE BRYANT QUINN

NEW YORK -- THE LIFE insurance industry loves to show pictures of good-looking men buying life insurance to save their grateful wives from the poorhouse.

Guess what? In most states, those good-looking men can also use life insurance to disinherit their wives (and wives can disinherit their husbands). You just dump your savings into a cash-value policy and leave that policy to someone else.

A number of states are considering laws to prevent this from happening. But the powerful insurance lobby is obstructing change.

Only three states have blocked disinheritance-by-insurance (Kansas, Minnesota and South Dakota).

Other states have rolled over when the lobbyists came to call.

In an attack on the laws, Jerry O'Leary, former senior counsel of the American Council on Life Insurance (ACLI) and now retired, wrote the following last year: "I believe we can all agree that the surviving spouse should be protected, but many question whether the surviving spouse should be 'canonized' and protected to the detriment of the insurance policy beneficiary."

At issue is a change proposed in probate law. It's part of the Uniform Probate Code (UPC), developed by a committee of lawyers to improve and simplify the process of leaving property to heirs. States decide individually what to accept from the UPC.

Probate assures that, when you die, the property you've left by will goes to the people you designate. But state law makes one exception. You're not allowed to disinherit a spouse unless the spouse consents.

In the nine states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin) with community property laws, spouses own one-half of the marital property.

In most of the other states, they get at least one-third or one-half of their spouse's property at death.

If you write a will that leaves your spouse too small a share, he or she can demand the full portion owed by law. Spouses, however, can give up their share voluntarily, by signing an agreement to do so.

Spousal-support laws have a valid public purpose. No monied spouse should be allowed to leave a penniless mate, who might have to go on welfare.

You're pretty well protected in a community property state, where half of the marital property is yours by law, says Los Angeles attorney Charles Collier. In most of the other states, however, huge loopholes exist, which can be used to cut a spouse out.

That's because the spousal share applies only to the property that's left by will.

Billions of dollars in assets pass outside the will: through joint ownership and the named beneficiaries of living trusts, annuities, individual retirement accounts or life insurance policies. In noncommunity property states, you can generally leave this property to anyone you want -- even if your spouse winds up without a dime.

The new UPC would stop all that. It says that, when a married person dies, all the assets of both spouses must be added up, including life insurance proceeds. The surviving spouse gets a share of the entire pot but no less than $50,000 (unless the spouse has formally waived his or her rights). Spouses in long marriages get a larger share than spouses in short ones.

Seven states have adopted this idea so far. But life insurance has been excluded in four of them (Colorado, Montana, North Dakota and West Virginia), as well as New York, which reformed along different lines from the UPC. There, a spouse can still be shortchanged, says Professor Lawrence Waggoner of the University of Michigan Law School.

Insurers think that the person who buys the coverage should decide where it goes, says Michael Bartholomew, managing counsel for the ACLI.

Mr. Bartholomew also claimed that, if a spouse could challenge the contract, insurers would have to go to court to figure out whom to pay.

That's not true, however. The UPC says insurers can pay the policy's named beneficiary, if the spouse hasn't entered a contrary claim.

If the spouse makes a claim, the payment goes to a court with no proceedings necessary for the insurance company.

In both cases, the insurer has no further liability.

Mr. Bartholomew backpedaled in a second interview. He knows of no state that requires a court proceeding. I mention this incident because some of the information used by the insurance lobby to defeat the UPC is similarly misleading.

Mr. Bartholomew says there's no proof that life insurance is used to disinherit a spouse. He's right that no data exist. But Denver attorney James Wade is sure that it's done. "It's a strategy discussed in estate-planning programs," he says.

If the UPC ends other ways of disinheriting spouses, why should life insurance be exempt?

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