(Image credit: San Jose State University)

Whenever a case concludes after a Marital Settlement Agreement is reached or an Equitable Distribution Order is issued, it is standard practice for attorneys to advise their clients to make changes to the beneficiary designations of any life insurance policies or retirement plans so long as doing so does not conflict with the terms of the Agreement or Order.  If a person dies without changing those designations, problems can arise between a party’s estate and federal regulations such as ERISA.  Specifically, we have seen situations where the deceased party’s life insurance policy still lists their ex-spouse as the beneficiary and the result is that their new spouse cannot receive a distribution they would have otherwise been entitled to receive.

This issue was recently highlighted by the U.S. Supreme Court’s decision in Hillman vs. Maretta.  The Hillman case is a Virginia lawsuit over the beneficiary designation of a government employee.  The issue arose based on Virginia law which is basically designed to “fix” the deceased’s mistake in not revising their beneficiary designations.  The Virginia law makes the former spouse liable for any insurance proceeds they may receive as a result of the deceased’s failure to make that change and prevent the ex-spouse from receiving an unintentional financial windfall.  The ex-spouse is required under the Virginia law to turn over the insurance proceeds to the current spouse.  The question became whether this Virginia law was preempted by the Federal Employees’ Group Life Insurance Act of 1954 (FEGLIA).

The Supreme Court unanimously decided that FEGLIA preempted the Virginia statute and the state law will not allow for a substitute beneficiary as a way to “correct” the deceased parties’ failure to update their beneficiary designations.

While a divorce is pending, it is typical to require the policy holder to maintain the current level of coverage and beneficiary designations.  Enforcing this rule helps create some security for the beneficiary in the event the other party dies before grounds for divorce has been established or if there is a child support obligation.  After the time, effort, and expense of an equitable distribution case, however, fatigue leads people to put off these changes, when they really should be addressed immediately.  This case reemphasizes the importance of updating and changing those beneficiary designations as soon as permissible.