Supremes Weigh in on Beneficiary Designations
Earlier this week the United States Supreme Court issued its opinion in the case of Hillman v. Maretta. The Hillman case involved the resolution of an apparent conflict between a Federal law and a Virginia law. While the legal question was one of federal pre-emption the result is instructive of the importance of regularly reviewing and updating beneficiary designations.The Federal Employees’ Group Life Insurance Act of 1954 (FEGLIA) establishes a life insurance program for federal employees. FEGLIA provides that an employee may designate a beneficiary to receive the proceeds of his life insurance at the time of his death. Judy Maretta (Judy) is the former spouse of Warren Hillman (Warren). In 1996, Warren named Judy as the beneficiary of a FEGLIA policy he had obtained. Warren and Judy subsequently divorced in 1998. Several years later Warren married Jacqueline Hillman (Jacqueline) and we can see where this is heading. In 2008 Warren died unexpectedly having never changed the beneficiary of his life insurance policy. Jacqueline filed a claim for the proceeds of the life insurance, but was informed that Judy was the beneficiary. Judy happily collected the death benefit of nearly $125,000. Jacqueline did what any red blooded American would do under the circumstances – she sued. The lawsuit was filed in a Virginia state court. The basis of the lawsuit was a Virginia statute that makes a former spouse (Judy in this case) liable to pay over the insurance proceeds received to whoever would have received them under applicable law (Jacqueline in this case) but for the beneficiary designation that had not been changed after the divorce. Many states across the country have similar laws. Judy responded that federal law controlled and that she should keep the insurance proceeds. The state court decided in favor of Jacqueline. The Virginia Supreme Court reversed and found in favor of Judy. The case was then appealed to the United States Supreme Court. The U.S. Supreme Court again held in favor of Judy and found that Federal law controlled. Judy kept the money.The moral of this story is that you may not be able to rely on your ex-wife to take care of your current wife. Seriously, this is another lesson in the importance of keeping things up to date. It is not wise to rely on default provisions of law to take care of things. A simple change of beneficiaries to Jacqueline would have avoided this whole mess. Given the relatively small amount of the death benefit, it is likely much more was spent on litigating the case than the policy was even worth. Regular annual review and updating of your beneficiary designations is recommended. Anytime a major life event occurs, such as birth, death, or divorce, a review should be conducted and appropriate updates completed. Planning really isn’t about those who have departed; it is about those left behind. Failure to properly consider and maintain beneficiary designations may just leave behind a mess.