Wills and Trusts

Wyatt, Tarrant & Combs, LLP

Federal Law Preempts State Law Revoking A Former Spouse as Beneficiary

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SECTIONS 61, 83, 409A, 2042 AND 7872 – LIFE INSURANCE

Federal employees receive a life insurance benefit under FEGLIA, the Federal Employees Group Life Insurance Act. FEGLIA provides that the proceeds are paid to the named beneficiary and preempts state law with respect to beneficiaries. Virginia provides that divorce automatically revokes beneficiary designation and provides that if such provision is preempted then the former Spouse must pay the amount received to the person who would have received the proceeds but for the preemption. Writing for a unanimous Supreme Court, in Hillman v. Maretta, 133 S.Ct. 128 (2013), Justice Sotomayor held that provisions was preempted too because it interferes with the scheme Congress created.

A similar issue has arisen over the years with prenuptial agreements attempting an end-run around the requirement of ERISA that only spouses may waive rights to retirement plans. Callahan v. Hutshell, Callahan & Buchino, PSC Revised Profit Sharing Plan, 813 F.Supp. 541 (W.D. Ky, Feb. 18 1992) vacated by unpublished 6th Cir. opinion, 14 F.3d 600 (6th Cir. Dec. 20, 1993).

A different twist arose in Hardy v. Hardy, 963 N.E.2d 470 (In. 2012), where the Indiana Supreme Court held that FEGLIA does not preempt a state law claim over a beneficiary designation. The opinion states:

In this case, an insured held a life insurance policy issued as part of a federal employee benefit plan. When the insured divorced from his first wife, the divorce decree and property settlement required the insured (1) to maintain the life insurance policy and (2) to designate the first wife and their grandchildren as equal beneficiaries. Subsequently, the insured remarried, designated his second wife as the sole beneficiary to the life insurance policy, and increased the insurance coverage. After some time, the insured and second wife divorced. When the insured died, the second wife remained the sole beneficiary on the life insurance policy.

The first wife and grandchildren filed suit, asserting equitable claims over the life insurance proceeds. On cross-motions for summary judgment, the trial court determined that federal employee benefit law preempted the equitable state law claims and that the policy proceeds accordingly belonged to the second wife.

We hold that the Federal Employees’ Group Life Insurance Act does not preempt the equitable claims and that the first wife and grandchildren are entitled to a constructive trust over at least a portion of the proceeds.

The Court further discussed the preemption question as follows:

Mary Jo [second wife] directs us to several FEGLIA provisions and the United States Supreme Court’s decision in Ridgway v. Ridgway, 454 U.S. 46, 102 S.Ct. 49, 70 L.Ed.2d 39 (1981), to support her position that FEGLIA precludes a court from imposing a constructive trust on life insurance proceeds. She also cites federal decisions that have ruled in favor of preemption.FN4

[FN4] E.g., Metro. Life Ins. Co. v. Zaldivar, 413 F.3d 119 (1st Cir.2005); Metro. Life Ins. Co. v. Sullivan, 96 F.3d 18 (2d Cir.1996); Metro. Life Ins. Co. v. Christ, 979 F.2d 575, 578 (7th Cir.1992); Dean v. Johnson, 881 F.2d 948 (10th Cir.1989); O’Neal v. Gonzalez, 839 F.2d 1437 (11th Cir.1988); Metro. Life Ins. Co. v. McMorris, 786 F.2d 379 (10th Cir.1986).

Phyllis [first wife] and the grandchildren acknowledge that federal court decisions, including Metropolitan Life Insurance Co. v. Christ, 979 F.2d 575 (7th Cir.1992), have decided that FEGLIA preempts equitable state law claims. But they point to numerous state courts that have reached a different result. FN5

[FN5] E.g., In re Anderson, 195 Ill.App.3d 644, 142 Ill.Dec. 79, 552 N.E.2d 429 (1990); McCord v. Spradling, 830 So.2d 1188 (Miss.2002); Kidd v. Pritzel, 821 S.W.2d 566 (Mo.Ct.App.1991); Sedarous v. Sedarous, 285 N.J.Super. 316, 666 A.2d 1362 (1995); Eonda v. Affinito, 427 Pa.Super. 317, 629 A.2d 119 (1993); Fagan v. Chaisson, 179 S.W.3d 35 (Tex.App.2005).

After careful consideration of the two distinct analyses on this issue, we choose to follow the majority of state courts in finding that there is nothing within FEGLIA or elsewhere preventing a state court from imposing a constructive trust on FEGLI proceeds. Accordingly, we conclude that FEGLIA does not preempt an equitable state law claim for a constructive trust, notwithstanding (1) FEGLIA provisions relating to the designation of beneficiaries; (2) FEGLIA’s preemption clause; and (3) Ridgway, 454 U.S. 46, 102 S.Ct. 49.

The court distinguished the Supreme Court’s holding in Ridgeway:

In Ridgway, the United States Supreme Court considered whether SGLIA (Servicemembers’ Group Life Insurance Act) precluded the imposition of a constructive trust. 454 U.S. at 47, 102 S.Ct. 49.Ridgway involved a divorce decree that ordered the insured to maintain life insurance policies, including a SGLIA policy, for the benefit of the three children from the first marriage. Id. at 48, 102 S.Ct. 49. After the divorce, the insured remarried and essentially designated his second wife as the beneficiary of his SGLIA policy. Id. at 48–49, 102 S.Ct. 49. After the insured died, both the first and second wives filed claims for the SGLIA proceeds. Id. at 49, 102 S.Ct. 49. Subsequently, the first wife, on behalf of the three minor children, filed suit, seeking to enjoin the payment of the SGLIA proceeds to the second wife. Id. Ultimately, the United States Supreme Court decided that SGLIA preempted equitable state law claims. Id. at 60, 62, 102 S.Ct. 49. The Court found that the beneficiary designation controlled, and thus the second wife was entitled to the proceeds. Id. at 62, 102 S.Ct. 49.

Although FEGLIA and SGLIA share similarities, there is one significant difference between the two Acts. Ridgway’s language on this difference is instructive.

In Ridgway, the Court determined that SGLIA’s order of precedence conferred a right on an insured to designate his policy beneficiary. Id. at 55–57, 102 S.Ct. 49. As discussed above, section 8705 of FEGLIA also confers this right on an insured. But Ridgway also extensively discussed SGLIA’s anti-attachment provision, which provided that SGLIA policy proceeds were exempt from creditors and “any ‘attachment, levy, or seizure by or under any legal or equitable process whatever,’ whether accomplished ‘either before or after receipt by the beneficiary.’ ” Id. at 61, 102 S.Ct. 49. The Court found that a constructive trust on the SGLIA proceeds would operate as a prohibited “seizure” of the SGLIA proceeds, in contravention of the anti-attachment provision. Id. at 60, 102 S.Ct. 49. Furthermore, “ Ridgway expressly stated that if Congress chose to avoid the result in that case, it could do so by enacting legislation which did not include an anti-attachment provision.” Kidd, 821 S.W.2d at 571 (citing Ridgway, 454 U.S. at 63, 102 S.Ct. 49).

Mary Jo argues that although Ridgway discussed the anti-attachment provision, it was one of two separate bases for preemption. Mary Jo asserts that because SGLIA’s order of precedence alone was sufficient to find that SGLIA preempted equitable state law claims, it is of no import that FEGLIA lacks an anti-attachment provision. The Court of Appeals agreed with Mary Jo’s contention, citing numerous federal decisions, including Christ in support. Hardy, 942 N.E.2d at 846–47.

In response, Phyllis and the grandchildren note that Ridgway (and Christ ) were decided before 1998. In 1998, subsection (e) was added to section 8705 to provide, as discussed above, that dissolution decrees could alter FEGLIA’s order of precedence where the decree was forwarded to the appropriate office prior to the insured’s death. Phyllis and the grandchildren argue that “[t]his provision is further evidence that the FEGLIA order of precedence is not about who ultimately receives the proceeds after they are paid … but rather is about a concern for administrative efficiency in the payment of claims.”

We first note that SGLIA does not contain a method, like section 8705(e) of FEGLIA, by which a decedent’s designation of beneficiary can be overridden. We also note that the purpose behind SGLIA is quite different than FEGLIA. As explained above, FEGLIA’s primary purpose revolves around administrative efficiency. On the other hand, when enacting SGLIA, Congress “ ‘spoke[ ] with force and clarity in directing that the proceeds belong to the named beneficiary and no other.’ ” 454 U.S. at 56, 102 S.Ct. 49 (quoting Wissner v. Wissner, 338 U.S. 655, 658, 70 S.Ct. 398, 94 L.Ed. 424 (1950))

Ultimately, the lack of an anti-attachment provision within FEGLIA, the divergent purposes underscoring FEGLIA and SGLIA, and the 1998 amendment to section 8705 of FEGLIA compel us to conclude that Ridgway is not controlling here. The order of preference in FEGLIA is an administrative tool to allow for the efficient payment of FEGLI proceeds. We realize that some decisions have interpreted Ridgway differently, but we respectfully disagree.

Will Hardy survive Hillman? It would seem unlikely.

Turney P. Berry
Louisville, Kentucky


Author: robmalinesq

I am an estate planning and probate attorney in Memphis, Tennessee.

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