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Revocation of Death Benefits by Divorce or Annulment and Federal Preemption - May 2014

May 22, 2014

by Jessica M. Booth

Under Virginia law (Va. Code § 20-111.1), upon the entry of a decree of annulment or divorce from the bond of matrimony on and after July 1, 1993, any revocable 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 generally is revoked. This general rule does not apply to the extent the decree of annulment or divorce or a written agreement between the parties provides for a contrary result. In addition, this general rule does not apply to any trust or any death benefit payable to or under any trust.

For purposes of this Virginia law, “death benefit” includes any payments under a life insurance contract, annuity, retirement arrangement, compensation agreement or other contract designating a beneficiary of any right, property or money in the form of a death benefit. A death benefit prevented from passing to a former spouse is paid as if the former spouse had predeceased the decedent.

Virginia law further provides that if it is preempted by federal law with respect to the payment of any death benefit, a former spouse who, not for value, receives the payment of any death benefit that the former spouse is not entitled to is personally liable for the amount of the payment to the person who would have been entitled to it but for the preemption.

A leading case on this issue is Eglehoff v. Egelhoff,532 U.S. 141, 121 S. Ct. 1322, 149 L. Ed. 2d 264, 2001 U.S. LEXIS 2458, 69 U.S.L.W. 4206, 25 Employee Benefits Cas. (BNA) 2089, 2001 Daily Journal DAR 2861, 2001 Colo. J. C.A.R. 1477, 14 Fla. L. Weekly Fed. S 147 (U.S. 2001). In Eglehoff, decedent husband died two months after his divorce from petitioner wife, intestate, and without having removed his wife as the designated beneficiary on a life insurance policy and a pension plan provided by his employer and governed by the Employee Retirement Income Security Act of 1974 (“ERISA”). Respondents, husband’s children from a previous marriage, sued wife to recover the life insurance and pension plan proceeds under a Washington state statute which provided that a spousal beneficiary designation of a non-probate asset was revoked automatically upon divorce. The state supreme court ruled in favor of respondents, holding that the Washington statute, although applicable to employee benefits plans, did not refer to or have a connection with ERISA plans to an extent that required ERISA to preempt the state statute. ERISA, by its express terms, provided that ERISA shall supersede state laws insofar as they relate to any ERISA covered employee benefit plan. The United States Supreme Court, reversing the state supreme court decision, determined that because the state statute directly conflicted with the ERISA requirements that plans be administered, and benefits paid, in accordance with plan documents, ERISA expressly preempted the state statute to the extent such statute applied to ERISA plans. The United States Supreme Court based its holding on the premise that the Washington state statute applied to ERISA plans as such statute (1) governed the payment of benefits, which was a central matter of plan administration and (2) interfered with nationally uniform plan administration, which is one of the principal goals of ERISA.

The United States Supreme Court recently addressed this issue in the context of Virginia law in Hillman v. Maretta, 133 S. Ct. 1943, 186 L. Ed. 2d 43, 2013 U.S. LEXIS 4167, 81 U.S.L.W. 4357, 24 Fla. L. Weekly Fed. S 227, 2013 WL 2371463 (U.S. 2013). In Hillman, decedent husband designated and did not change respondent former wife as beneficiary of his Federal Employees’ Group Life Insurance policy established under the Federal Employees’ Group Life Insurance Act of 1954 (“FEGLIA”). Decedent husband subsequently married petitioner wife. Following husband’s death, the Office of Personnel Management paid the policy proceeds to the respondent former wife. Petitioner wife sued respondent former wife in a Virginia court and sought an order under Section D of Va. Code § 20-111.1 which renders a former spouse liable for insurance proceeds to whoever would have received such proceeds but for the beneficiary designation (in this case, petitioner wife). The state trial court issued the order, finding respondent former wife liable to petitioner wife; however, the Virginia Supreme Court reversed the trial court’s order and the United States Supreme Court affirmed the Virginia Supreme Court’s judgment. The parties agreed that Section A of Va. Code § 20-111.1, which revokes a beneficiary designation in any contract that provides a death benefit to a former spouse where there has been a change in decedent’s marital status, is preempted by FEGLIA. The United States Supreme Court affirmed the Virginia Supreme Court’s judgment based on its finding that Section D of Va. Code § 20-111.1 was preempted by FEGLIA, holding that Virginia law displaced the beneficiary (respondent former wife) selected by the insured decedent husband in accordance with FEGLIA and placed someone else (petitioner wife) in her stead, thereby frustrating the deliberate purpose of Congress which is to ensure that a federal employee’s named beneficiary receives the life insurance proceeds.