– When the beneficiary designation was not made bullet-proof and the estate’s assets swell –
A beneficiary right without a gift agreement is usually worthless in economic terms
The ordinarily revocable beneficiary right under a life insurance policy is not, on its own, sufficient to entitle the beneficiary to keep the later payout from the insurance company (VU): from the heirs’ perspective the beneficiary would be unjustly enriched – they need only revoke the designation before it is executed. An additional gift agreement (Schenkungsvertrag) between the policyholder (VN) and the beneficiary is therefore also required. Often the beneficiary is entirely unaware of their good fortune; no effective gift agreement yet exists. If they do know of the designation, there is a risk that they cannot wait that long – above all where money only flows on death.
The gift agreement may be effective or in abeyance
The exception in practice is the additional notarial gift agreement with the beneficiary of the life insurance policy, § 518 I BGB (German Civil Code). Hardly any insurance intermediary also sends their clients to a notary. Without notarial form, the policyholder’s promise of a gift would only become effective upon “performance” of the benefit, that is upon payout, § 518 II BGB. Many policyholders want it precisely this way, so that – like Eumolpus in Croton – they can change beneficiaries every evening.
Discretion through a notarial gift without the beneficiary’s involvement?
One variant of supposed “protection of the heirs” is the notarial gift agreement in which the donor also acts for the beneficiary as an “agent without authority”. Even then the donor wishes to keep everything in their own hands until death, so that the gift agreement remains in abeyance during their lifetime without the beneficiary’s ratification. The donor or testator can also withdraw the revocable beneficiary right or even surrender the life insurance policy. Yet merely destroying the deed of gift will not eliminate the gift – so it would be necessary to regulate which reservations apply, for example where performance becomes impossible because the policy lapses during the donor’s lifetime.
Until ratification by the beneficiary the gift is not effective, §§ 177 I, 184 I BGB. Subsequent ratification, in particular after the donor’s death, would then presuppose that (a) the beneficiary learns of their good fortune – and (b) also declares acceptance of the gift to the heir as the testator’s legal successor, § 1922 BGB.
A ratification declared in advance, before the heir’s request, becomes ineffective, § 177 I 1 BGB – which can confuse the donee: once requested, the beneficiary has two weeks to ratify – after that the gift would be ineffective, § 177 II 2 BGB. If the heir lives abroad, the postal delivery time may exceed two weeks. In an individual case months or years may pass before it is even judicially settled who became the heir.
Pinning the ratification to the great oak in Büsingpark is not provided for by law. It may also happen that a non-heir, or only one co-heir without authority from the other co-heirs, issues the request for ratification – giving rise to further pitfalls for beneficiaries.
Should a dispute arise between the heirs and the beneficiary, the insurer can take itself out of the line of fire and usually deposit the funds with the local court (Amtsgericht) under the rules on judicial deposit.
The lost insurance proceeds in practice
The insurer will not go looking for beneficiaries; it sometimes does not even know them. A notification of assets and beneficiary designation to the probate courts likewise rarely occurs. Decades later the insurer can book the assets for itself as so-called extraordinary income. Or some resourceful division head sends spam emails to random addresses, inviting people to get in touch in order to pose as the beneficiary.
If an heir finds the notarial gift agreement among the estate papers, they may recall the saying: “Had you kept silent, you would have remained a philosopher.” The unwitting beneficiary’s legal claim could then quietly become time-barred. Crime-scene cleaners are more conscientious in this respect – and will readily describe how they fish presumed important papers out of the toilet bowl.
If the testator or donor wants to be on the safe side, they would additionally have to include the designation in the will as a legacy. If, however, the insurance contract no longer exists on the day of death, the testamentary legacy regularly lapses as well. The wording can be decisive here – and later the risk of a different interpretation by the courts. Finally, gifts and wills may also be challengeable by the heirs.
The elimination of the life insurance policy by the heirs even years after death
In practice it has already happened that the policyholder initially named his two children as beneficiaries on death. As the insured persons (VP) the children would have had to consent for the insurance contract to become effective, § 150 II VVG (German Insurance Contract Act) or § 159 II VVG (old version). Later the policyholder changed the beneficiary designation (in case of doubt merely a contract amendment; BGH (Federal Court of Justice), judgment of 26 October 2010, ref. XI ZR 367/07) and then died. The heirs will rely on the argument that the insurance contract, and with it all beneficiary rights, were ineffective and that the insurer must pay the premiums out to the heirs. Not infrequently heirs can rescind the insurance contract for an eternity, something the (then defective) policy structuring quite often permits. A change of beneficiary designation, too, can give the heirs the option of unwinding, because there as well the insured person must consent – which has sometimes been overlooked; BGH, judgment of 25.09.2019, ref. IV ZR 99/18.
Special structures using life insurance
Testators sometimes benefit persons outside the family through life insurance – in individual cases to the point of over-indebting the estate, or “merely” to circumvent compulsory-share (forced heirship) claims. This is of course corrected, for instance, by the German Insolvency Code (InsO) and the Avoidance Act (Anfechtungsgesetz).
Discretion beyond death, also to avoid later disputes, requires particularly prudent structuring and a fine touch in the timing of the lead-up. Later gift tax, including tax on prior gifts going back as far as 30 years, would also have to be considered. Any trustees or, say, executors are liable for any levies due on payouts, §§ 33 et seq., 69 et seq. AO (German Fiscal Code). The testator, by contrast, may rather think “After me, the deluge”.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
