Last month, the U.S. Supreme Court ruled in Hillman v. Maretta that federal law trumps state law related to beneficiary designations under a federal life insurance policy. Often, federal employees receive a life insurance benefit associated with their employment. The Hillman case presented these facts to the Supreme Court.
The Hillman case concerned a federal employee from Virginia. He had an employer-sponsored life insurance policy that named his wife as his primary beneficiary. That was perfectly fine until they divorced. After the divorce, he never changed the beneficiary designation. Subsequently, he died. Virginia law, like Wisconsin law, has a statutory provision that legally removes a divorced spouse from being treated as a beneficiary of a life insurance policy or retirement account. Oddly, Virginia state law conflicted with federal law.
Federal law regularly preempts or trumps state law. Federal law is more powerful, and if there is a conflict between federal law and state law; typically, federal law wins. In the Hillman case, the Supreme Court held that the beneficiary designation remained effective. The federal law reads that the policy proceeds are paid to the designated beneficiary. It makes no difference that the employee was divorced from the primary beneficiary.
As a result of the court's decision, the ex-spouse inherited a death benefit of $124,558.03. The Hillman decision reminds planners that continual vigilance related to beneficiary designations is critical. Facts change; clients divorce; and clients have more children. When these life events occur, the beneficiary designations need to be reviewed.
This Supreme Court decision should only apply to life insurance policies and retirement accounts established under federal law; however, some commentators believe that the federal Employee Retirement Income Security Act (ERISA) could cause the court's decision to have a broader impact. If this is true, then an argument could be made that the Supreme Court's decision applies to any retirement plan governed by ERISA, which would encompass countless retirement plans across the nation.
The bottom line is to remember to change beneficiary designations. This same principal also applies to Payable on Death Designations and Transfer on Death Designations. Be vigilant, or you may have a deceased client's family pointing a finger at you, because you didn't remind the deceased client to change his or her beneficiary designation after that nasty divorce.
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