Hillman vs. Maretta
U.S. Supreme Court, No. 11-1221
June 3, 2013

In a recent U.S. Supreme Court case, the Court ruled that a decedent’s ex-spouse, who was still named as his beneficiary, was entitled to receive his federal life insurance benefits. The decision was unanimous, despite the fact that an applicable state law says that an ex-spouse is removed as the beneficiary of a decedent’s various death benefits after divorce.

Facts of the Case
In 1996 Warren Hillman named his then-wife, Judy Maretta, as the beneficiary of his Federal Employees’ Group Life Insurance (FEGLI) policy. Two years later, however, the couple divorced.

In 2002, Hillman married Jacqueline. The two remained married until Warren’s unexpected death in 2008. Despite having divorced Judy some 10 years earlier, and having been married to Jacqueline for six years, Warren never updated his FEGLI beneficiary form and so, on the date of his death, his ex-wife, Judy, was still his named beneficiary.

While Judy was clearly the named beneficiary, thanks to a series of conflicting federal and state laws, a dispute ensued that ultimately called into question who was the rightful recipient of the FEGLI benefits. First, a Virginia state law directly opposed Hillman’s beneficiary designation. Under the law, when a couple divorces, they are no longer treated as one another’s beneficiaries, even if their beneficiary forms say otherwise. This, on its own might lead one to think that Judy would no longer be entitled to receive Warren’s FELGI benefits.

However, an applicable provision of the Federal Employees’ Group Life Insurance Act (FEGLIA), the federal law that created FEGLI benefits, further contradicts the Virginia statute. Part of that law explicitly states that its FEGLI contract provisions supersede any state laws that may differ. In that case, the FEGLI beneficiary form would, once again, control who received the benefits.

Thanks to this FEGLIA provision, it was clear that the FEGLI benefits would be paid to Warren Hillman’s ex-wife, Judy, but an additional provision in Virginia’s law called into question whether she would be able to keep those benefits. Under the law, if the aforementioned provision removing an ex-spouse as the beneficiary of a person’s death benefits is overridden by federal law, an ex-spouse receiving those benefits can be held, under Virginia law, personally liable to the person who would have otherwise received them. In other words, in this situation, even though Judy would receive Warren’s FEGLI benefits, she could be forced to turn over those benefits to Jacqueline after receiving them.

Jacqueline believed that as long as Judy was actually the person who directly received the FEGLI benefits, she could compel her to turn over those benefits under the second Virginia state law provision, without violating any federal legislation. In her opinion, Congress’ goal behind the FEGLIA provision was to create “administrative convenience.” Judy, on the other hand, believed Congress had more in mind than merely convenience. She believed that the intent of the FEGLIA provision is to make sure whoever is designated as the beneficiary receives and keeps those funds. Unable to agree, the two sides ultimately wound up in court.

U.S. Supreme Court Decision
Much like the back-and-forth in the laws which led to the situation in the first place, the lower courts went back and forth as to who should get to keep the money, but on June 3, 2013 the U.S. Supreme Court decided the issue for good, deciding unanimously, 9-0, to affirm the Virginia Supreme Court’s decision to award Judy the FEGLI benefits. In the Court’s opinion, the Virginia statute holding Judy liable to Jacqueline for the FEGLI benefit “interferes with Congress’ scheme, because it directs that the proceeds actually ‘belong’ to someone other than the named beneficiary…”

The Supreme Court also pointed out that many people fail to properly update their beneficiary forms and that this was something Congress has been aware of. Therefore, had Congress desired that FEGLI benefits be awarded to someone other than a person named on the beneficiary form – say, perhaps, a current spouse – they could have passed legislation to do so. Finally, the Court noted that to decide otherwise would be viewing the FEGLI statute so narrowly that states could easily create laws to work around its true intention.

Proactive Planning Trumps Every Time
It’s important for advisors not to read the U. S. Supreme Court’s decision too broadly though. In its decision, the Court did not say that the Virginia state law was unconstitutional, nor did it find any issue with the law in general. Instead, it simply decided that the law was in conflict with federal law in this situation. That begs the question, “Would the beneficiary form still trump similar provisions, even if they did not oppose a federal statute?”

The U.S. Supreme Court decision does not say that state statutes, such as the one in Virginia, can’t be applied to other assets with death benefits, such as IRAs, when there are no competing federal laws. Similarly, some IRA custodians, themselves, now have similar provisions as part of their custodial agreements, where a divorced spouse is no longer treated as the beneficiary of their ex-spouse’s IRA unless there is another affirmative election after the divorce has been finalized. Unlike FEGLI benefits, these IRA agreements are not really governed by federal law. Therefore, one can envision the courts deciding that such a provision would be valid and awarding an inherited IRA to someone other than the named IRA beneficiary.

Mistakes like this one can be prevented with just a little bit of effort. Advisors must make sure to conduct regular beneficiary reviews to avoid similar problems for their clients.

As the Hillman case points out, however, it’s important that such reviews extend beyond any retirement accounts, annuities or life insurance a financial advisor may have provided or oversee. All accounts and policies that can pass by way of beneficiary forms should be reviewed.

Why rely on state law or a custodial contract to avoid having an IRA or other assets pass to an ex-spouse, or other unwanted beneficiary, when the same result can be accomplished with certainty simply by updating the beneficiary form?