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Below is the latest newsletter from Steve Liemberg in which attorneys Alan Gassman and Christopher Denicolo discuss the federal ruling that if the owner of a life insurance policy leaves their ex-spouse as a beneficiary, the ex-spouse will get the money despite state laws that automatically remove ex-spouses as beneficiaries.  The ruling highlights the importance of our advice to clients to always update beneficiary designations on all accounts after a major change such as divorce or re-marriage.

Gassman and Denicolo on the 9-0 Supreme Court Decision in Hillman v. Maretta: Where Did Our Cash Go?  Steve Liemberg’s Estate Planning Newsletter

“…a FEGLI policy in fact highlights Congress’ intent to allow an employee wide latitude to determine how the proceeds should be paid, whether that is to a named beneficiary that he selects, or indirectly through the assignment of the policy itself to someone else.”  

“Baby baby, where did our [cash] go” 

Now, we close the week with Alan Gassman and Christopher Denicolo’s commentary the Supreme Court’s decision in Hillman v. Maretta. In Hillman, the Court unanimously found that federal statutes trump state law that would otherwise remove a divorced spouse from being a beneficiary under a federal life insurance policy.  The opinion underscores the importance of ensuring that beneficiary designations are current, an issue LISI has continuously brought to the attention of members.

Alan S. Gassman, J.D., LL.M. practices law in Clearwater, Florida. Each year he publishes numerous articles in publications such as BNA Tax & Accounting, Estate Planning, Trusts and Estates, The Journal of Asset Protection, and Steve Leimberg’s Asset Protection Planning Newsletters. Mr. Gassman is a fellow of the American Bar Foundation, a member of the Executive Council of the Tax Section of the Florida Bar, and has been quoted on many occasions in publications such as The Wall Street Journal, Forbes Magazine, Medical Economics, Modern Healthcare, and Florida Trend magazine. He is an author, along with Kenneth Crotty and Christopher Denicolo, of the BNA Tax & Accounting book Estate Tax Planning in 2011 and 2012. He is the senior partner at Gassman Law Associates, P.A. in Clearwater, Florida, which he founded in 1987.  His email address is agassman@gassmanpa.com.

Christopher J. Denicolo, J.D., LL.M.  is an partner at the Clearwater, Florida law firm of Gassman, Bates & Associates, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law.

Here is their commentary:

EXECUTIVE SUMMARY:

The Federal Employees’ Group Life Insurance Act (“FEGLIA”) establishes a life insurance program whereby the insured employee designates a beneficiary to receive the proceeds of their Federal Employees’ Group Life Insurance (“FEGLI”) on death. This federal law conflicts with Virginia’s conventional statute, which provides that a divorced spouse will be considered as removed as a designated beneficiary, leaving the new spouse wondering:  “Baby, baby, where did our love go?” as the money from the policy took a midnight train to Georgia to the ex-wife whether she was deserving of the money or not.

FACTS:

Justice Sotomayor delivered this unanimous opinion of the Court, which affirmed the Virginia Supreme Court decision on this subject. Mr. Warren Hillman and respondent Ms. Judy Maretta were married and in 1996. Mr. Hillman named Ms. Maretta as the beneficiary of his FEGLI policy. They later divorced and Mr. Hillman married petitioner Ms. Jacqueline Hillman.
Upon Mr. Hillman’s sudden death in 2008 Ms. Maretta was still named as the beneficiary for his FEGLI policy, though the two were divorced and Mr. Hillman had already remarried. As such, Ms. Maretta received benefits from his FEGLI plan amounting to $124,558.03.
Ms. Hillman brought an action to claim the benefits from the insurance plan under a Virginia statute, Va. Code Ann. § 20-111.1(A), which states that divorced spouses cease to be the designated beneficiaries of each other’s life insurance policies, Instead the statute appropriately directs that decedent’s widow or widower at the time of death, or if none, descendants, become entitled to the benefits.  Thus, this was a question of preemption between the state statute and the antiquated FEGLIA statute, which provides that the benefits follow in the order of precedence, with the designated beneficiary as the first person in line to receive the proceeds of the policy upon the employee’s death.

COMMENT:

The Supreme Court had no choice but to find that the Virginia state law statute was preempted by a federal statute providing for an order of precedence of beneficiaries under FEGLI policies.  The ex-spouse therefore remained as the beneficiary of the decedent’s life insurance policy, notwithstanding that they had divorced since she was named as the beneficiary of the policy, and that Virginia state law provided otherwise.

Pursuant to a federal statute under the FEGLIA statute governing FEGLI policies, an “order of precedence” is established so that policy proceeds accrue on the death of the employee “[f]irst, to the beneficiary or beneficiaries designated by the employee in a signed and witnessed writing received before death…if there is no designated beneficiary, the benefits are paid to the widow or widower of the employee….[a]bsent a widow or widower, the benefits accrue to the child or children of the employee and descendants of [the] deceased children, the parents of the employee or their survivors; the executor or administrator of the estate of the employee, and last, to other next of kin.” 5 U.S.C. §8705(a).

Further, a federal statute under FEGLIA includes an express preemption provision, which provides that “[t]he provisions of any contract under [FEGLIA] which relate to the nature or extent of coverage or benefits (including payments with respect to benefits) shall supersede and, pre-empt any law of any State . . . , which relates to group life insurance to the extent that the law or regulation is inconsistent with the contractual provisions.” 5 U.S.C. §8709(d)(1).

Section 20.111.1(A) of the Virginia Code provides that divorce or annulment “revoke[s] a beneficiary designation contained in a then existing written contract owned by one party that provides for the payment of any death benefit to the other party.”  For the purposes of this statute, a “death benefit” includes payments under life insurance contract.  Further, Section 20.111.1(D) of the Virginia Code provides that if the above referenced Subsection (A) is preempted by federal law with respect to the payment of any death benefit, then a cause of action is created rendering the ex-spouse liable for the principal amount of the life insurance proceeds to the person who would have received them if Subsection (A) had not be preempted.

The Court’s opinion stated that the Virginia statutes “interferes with Congress’ scheme,” which provides for a “clear and predictable procedure for an employee to indicate who the intended beneficiary of his life insurance will be.”  Accordingly, the insurance proceeds that the ex-spouse is owed under FEGLIA cannot be allocated to another person by operation of state law.

The decedent’s ex-spouse may or may not have followed the pronouncement of the decision by the Supreme Court with another Supremes classic, “Where Did Our Love Go?”, although with more appropriate lyrics, while possibly contemplating whether there is a cause of action against any professionals who did not advise the divorcing husband to change his beneficiary designation on his FEGLIA policy:

Baby, baby
Baby don’t leave me
Ooh, without your FEGLI (policy)
All to myself

 I’ve got this burning, burning
Yearning feelin’ inside me
Ooh, you can’t decline me
And it hurts so bad (for your widow)

You came into my heart
So tenderly
With a federal plan
The beneficiary is she

Now I must surrender
That FEGLI (policy)
That you must leave
Ooh, that you must leave to she

Ooh, baby, baby
Where did that cash go?
Ooh, you didn’t want she
Should have changed it, of course

Ooh, baby
Baby, baby
Where did that cash go
And all your promises
Are out the window

I’ve got this burning, burning
Yearning feelin’ inside me
Ooh, you just declined me
And it hurts so bad (for your widow)

Once you got divorced
You should have changed it right
But you forgot to
So I’m really uptight.
You can’t leave me behind
Baby, baby, ooh baby

Baby, baby don’t leave me

Ooh, without your FEGLI (policy)
All by myself
Ooh, baby, baby
Where did our lawyer go?

CONCLUSION 

While it is likely that the holding of this case applies only to those assets and contracts that are established under federal law, some commentators have expressed concern that a court will extend the holding in this case to apply to any retirement plan or other asset or contract that is governed under ERISA or to which an order of precedence of beneficiaries established under federal law applies.

It remains to be seen whether other states’ statutes providing that divorce or annulment of a marriage removes an ex-spouse from beneficiary designations of the other spouse will be challenged based upon preemption of the federal law. In any event, advisors and clients can avoid this by changing their beneficiary designations as their lives change.

The moral of the story is that advisors should help assure that clients change their beneficiary designations as circumstances in their lives change to confirm that their intentions and wishes will be reflected after their deaths.  It is imprudent to rely upon the operation of state law to remove a client’s ex-spouse as a beneficiary of his or her life insurance, retirement plans or annuity contracts, and proper practice dictates that we regularly encourage our clients to assure that their beneficiary designations are current and to update them if necessary. A blanket change of beneficiary form purporting to change all existing beneficiary designations existing at the time of a divorce may also be employed as a belt and suspenders method of trying to assure that even specific designations that slip through the cracks would be handled, if the policy or plan allows.
Not many clients want their ex-spouses asking “Where Did Our Love Go?” only to find that it still remains in the form of life insurance policy benefits, albeit unintentionally.  If accidental death rates increase as a result of this decision then it may be more important than ever that the Federal law be brought up to the present century in this regards.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!
Alan Gassman
Christopher Denicolo

CITE AS:

LISI Estate Planning Newsletter #2106 (June 6, 2013) at https://www.leimbergservices.com. Copyright 2013 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.

CITE: 
Hillman v. Maretta, 133 S. Ct. 928 – Supreme Court 2013