I wrote about this in an earlier blog post, but it bears repeating that a divorce is not over just because the judge signed the judgment or decree. The United States Supreme Court recently issued a decision which emphasized the importance of making sure that following the entry of your divorce judgment you need to update beneficiary designations in life insurance policies and other financial accounts or products that have payable on death beneficiaries.
In Hillman v. Maretta, a federal employee owned an insurance policy governed by the Federal Employee’s Group Life Insurance (FEGLI) program. The employee designated his then wife as beneficiary of that policy. The statutes that govern the FEGLI program provide that insurance proceeds will be paid to the designated beneficiary, which can be changed at any time.
In 1998 the employee and his wife divorced. He failed to change the beneficiary designation on the FEGLI policy following his divorce. He remarried in 2002 and unexpectedly died in 2008. Following his death his new wife attempted to claim the insurance proceeds, but was informed that she was not the designated beneficiary, that the employee’s ex-wife was the designated beneficiary. The ex-wife filed a claim for the death benefits and received $120,000.00 in benefits.
Litigation ensued between the two women. Under Virginia state law, the decedent’s wife claimed that she was entitled to receive the insurance proceeds as the employee’s wife and heir. The state law she relied on provided that once the benefits were paid out to the ex-wife per the designation in the policy, the employee’s wife could sue the ex-wife to recover the insurance proceeds that were paid out.
After the case made its way through the state court system, a petition for review was filed with the U.S. Supreme Court which granted the petition and ultimately decided the case. The U.S. Supreme Court held that the federal law preempted state law and that the designated beneficiary, the ex-wife, was entitled to receive the insurance proceeds outright, without interference from the state laws.
This case emphasizes the importance of changing beneficiary designations in life insurance policies, IRAs, and other financial accounts that have payable on death beneficiaries following a divorce. One step, changing the beneficiary designation, could have prevented an undesired result and avoided years of litigation that most likely racked up tens if not hundreds of thousands of dollars in legal fees.
Even if the Court had ruled in the current wife’s favor, she spent years fighting in court and most of the insurance proceeds were likely spent on attorneys fighting over highly nuanced laws. The ex-wife received the funds outright. Had the U.S Supreme Court ruled in the current wife’s favor, what would have happened had the ex-wife spent all the proceeds and didn’t have any assets to repay the current wife?
Remember that a divorce isn’t final just because the judgment has been entered. There are still steps that need to be taken. Take the time to update your beneficiary designations on your retirement accounts, life insurance and annuities, and your bank account and also update and change your will, trust, and other estate planning documents so that these fights don’t occur.