Wednesday, June 12, 2013

STATE LAW WILL NOT HELP OUT IN ALL DIVORCE SITUATIONS

Many states, including Florida, automatically terminate former spouses as beneficiaries under life insurance policies, annuities, and other beneficiary-designated accounts upon divorce. This avoids a former spouse receiving testamentary benefits simply because their divorcing spouse forgot to, or never got around to, changing beneficiary designations after divorce.

The U.S. Supreme Court issued a recent opinion that overrode such a statute in Virginia in regard to federal life insurance under the Federal Employees’ Group Life Insurance program. Based on the supremacy of federal law over state law, the former spouse beneficiary designation under the program could not be changed by the Virginia statute. Instead, the former spouse could be removed only through a formal change of beneficiary by the insured spouse.

Under this analysis, state statutes that change beneficiaries at divorce are unlikely to have any effect in regard to other federal accounts and plans, such as pension plans. Thus, divorcing spouses should not rely on state statutes in this regard, and will need to submit change of beneficiary forms upon divorce for these federal items.

Interestingly, Virginia anticipated that its law might be pre-empted, so it tried an end run around pre-emption. It enacted a statute that provides if the change of beneficiary statute is pre-empted, then the former spouse would be liable for the principal amount of the proceeds received by it to the party who would have received them were the statute not pre-empted. The Supreme Court found that such liability “frustrates the deliberate purpose of Congress” in regard to its beneficiary designation scheme, and thus such provision was also found to have been pre-empted.

Hillman v. Maretta, 133 S.Ct. 1943 (2013)

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