Private Client Services Update - U.S. Supreme Court Vindicates Virginia Supreme Court’s “Minority Position” On Federally Governed Death Benefits

In estate litigation matters, which seem to be increasing in frequency as estate planning vehicles become more complex, we often deal with conflicts between how a divorced spouse has said he or she will designate retirement benefits, and what actually has occurred. In the most benign scenario, years after obtaining the divorce and moving on with their lives, an ex-spouse may simply have forgotten the terms of a property settlement and done something that conflicts with it. In a nastier situation, the ex-spouse may deliberately have changed things, even if contrary to the terms of a court order. And while many people think that a divorce decree from a Virginia court is enough to protect their rights, a decision last month by the United States Supreme Court demonstrates why that may not be true.

On June 3rd, the U.S. Supreme Court issued an opinion, stemming from an appeal from the Virginia Supreme Court, which dealt with the interaction between state laws and federally governed death benefits. In Hillman v. Maretta, the U.S. Supreme Court addressed the issue of whether the Federal Employees’ Group Life Insurance Act of 1954 (FEGLIA) preempted a Virginia law, Virginia Code § 20-111.1, which automatically revokes divorcing spouses as beneficiaries of each other’s federal life insurance policies. In a decision that seems likely to have a broad impact on the relationship between state laws and federally governed retirement benefits, the U.S. Supreme Court affirmed the Virginia Supreme Court’s decision that FEGLIA preempted the Virginia statute, and held that the statute interfered with Congress’ intent to have insurance proceeds belong to the named beneficiary and no other.

The factual scenario in Hillman is a variation of an all-too-common theme involving ex-spouses, and is one we often see when litigating trust and estate matters. Mr. Hillman married Ms. Maretta and designated her as the beneficiary under his life insurance plan governed by FEGLIA. Mr. Hillman then divorced Ms. Maretta and later married Ms. Hillman. However, after getting re-married, Mr. Hillman never changed his beneficiary designation, leaving Ms. Maretta as his designated beneficiary. Upon Mr. Hillman’s abrupt death, his life insurance benefits were paid to Ms. Maretta pursuant to the unchanged beneficiary designation on the policy. Ms. Hillman sued under Virginia Code § 20-111.1 to force Ms. Maretta to turn over the funds, and asked the trial court to impose a constructive trust on the proceeds paid to Ms. Maretta, deem the beneficiary designation revoked and award judgment to her as the current spouse.

Upon entry of a decree of annulment or divorce, Virginia Code § 20-111.1(A) expressly revokes any revocable beneficiary designation contained in a written contract owned by one party that provides for payment of life insurance, annuities, retirement benefits or other benefits payable on death, to the extent federal preemption does not apply. If federal preemption applies, Section D then renders a former spouse who receives death benefits personally liable to anyone who would have rightfully received them under Section A.

The trial court awarded judgment to Ms. Hillman, and required Ms. Maretta to turn over the proceeds. Ms. Maretta appealed. The Virginia Supreme Court overturned the circuit court’s decision, finding that FEGLIA preempted state law claims1, including Section D of the statute. In other words, because Mr. Hillman never changed his designated beneficiary and FEGLIA gave precedence to a designated beneficiary, state law could do nothing to require otherwise. The Virginia Supreme Court fully recognized that its decision joined the minority of courts which had decided such an issue. In doing so, it agreed with other courts which had concluded Congress “also intended to grant an insured the right to name without restriction, to the exclusion of all others, the person who will receive the benefits from a FEGLIA policy.”2 The Court specifically held that it believed Congress had intended for the policy proceeds to “belong to the named beneficiary and no other.”3

In reaching its decision, the Virginia Supreme Court looked outside FEGLIA to decisions stemming from other federal retirement statutes. For example, the Court relied on the U.S. Supreme Court decision in Ridgway v. Ridgway4, where a divorced serviceman named his new wife as beneficiary of his Servicemembers Group Life Insurance (“SGLI”) benefits, contrary to a state court divorce decree. In that case, the ex-wife filed suit, seeking a constructive trust on the proceeds of the life insurance policy, and the state court imposed a constructive trust and ordered the widow to turn over the proceeds. The U.S. Supreme Court reversed, holding that state law imposing a constructive trust on the SGLI benefits was preempted by the portion of the federal regulations allowing the servicemember to designate whoever he wished on the policy.5 A similarly analogous statute is the Employees Retirement Income Security Act of 1974 (“ERISA”).

In its opinion issued June 3rd, the U.S. Supreme Court analysis echoes that of the Virginia Supreme Court. Specifically, the U.S. Supreme Court held the purpose of FEGLIA is to provide federal employees with a clear and predictable procedure to select a beneficiary and to ensure the proceeds actually belong to that beneficiary. By allowing Ms. Hillman to sue to recover the benefits in the event the Virginia statute’s revocation was preempted, the Virginia statute directly opposed the federal law’s policy and essentially substituted the current spouse for the named beneficiary.6 The Court noted that even though FEGLIA contains a limited exception which permits proceeds to be paid to someone other than the named beneficiary, the Virginia statute permitted an alternative distribution outside the clear procedure Congress established. If the Virginia statute were allowed to stand, FEGLIA’s “narrow exception would be transformed into a general license for state law to override FEGLIA.” 7

Importantly, nothing in Hillman or Ridgway indicates that the analysis would be different under other similarly constructed statutory schemes, such as ERISA. In fact, in her dissent in the Virginia case, Justice McClanahan pointed out many of the similarities between the two statutes.8 Like SGLIA’s and FEGLIA’s “order of precedence” provisions,9 ERISA also requires payment of benefits to the designated beneficiary.10 Also like SGLIA and FEGLIA, ERISA expressly preempts “all State laws” that “relate to” an ERISA plan11 Therefore, it is likely that the U.S. Supreme Court and the Virginia Supreme Court would have adopted the same position had the benefits in the Hillman case been payable under ERISA, or another comparable statute.

The Hillman decision has multiple potentially significant implications on estate planning and family law. First, it was entirely avoidable through a conscientious estate plan. Mr. Hillman committed a common estate planning error by failing to ensure that the beneficiary designations for his life insurance and retirement benefits conformed with his overall estate plan. Second, the decision serves as a cautionary tale to determine whether federal law applies to the rights and obligations governing the distribution of a client’s life insurance or other employer-related death benefits. If so, neither state law nor a state court order can be relied upon as dispositive.

As an aside, in 2012, the Virginia legislature enacted a change to Virginia Code § 20-111.1. Section E now requires a disclaimer in conspicuous, bold print on every decree of annulment or divorce, stating that any party intending to revoke a designated beneficiary is responsible for following the provider’s instructions to change the designation. Otherwise, as the U.S. Supreme Court held a couple weeks ago, existing beneficiary designations may remain in full force and effect, even after entry of the final state decree. Unfortunately, this disclaimer came too late for Mr. Hillman and his widow.

1See 5 U.S.C. § 8709(d)(1)
2Maretta v. Hillman, 283 Va. 34, 42, 722 S.E.2d 32, 35 (2012)
3Maretta, 283 Va. at 46, 722 S.E.2d at 37 (quoting Ridgway v. Ridgway, 454 U.S. 46, 56 (1981))
4454 U.S. 46 (1981)
5Id. at 59-60
6§ 8705(e) requires the requisite documentation to be filed with the Government before the federal employee’s death, thereby ensuring that any departure from the named beneficiary is managed from within the federal system.
7Hillman v. Maretta, No. 11-1221 (June 3, 2013), Slip Op. at 13
8283 Va. at 46.
95 U.S.C. § 8705(a)
10See 29 U.S.C. § 1104(a)(1)(D)
1129 U.S.C. § 1144(a)

W. Hunter Old is a member in the firm’s Williamsburg office, where his litigation practice focuses on the representation of individuals and businesses in federal and state courts. He represents fiduciaries or beneficiaries in contested matters involving wills, estates, trusts, guardianships and conservatorships. He also handles general commercial litigation and aviation-related matters, and heads the firm’s Aviation Law and Finance Team.

Christopher T. Page is an associate in the firm’s Williamsburg office, where he maintains a diverse civil litigation practice. He represents individuals, businesses, and others on a range of issues, including trust and estate litigation, with a focus on will and trust disputes, fiduciary challenges, and conservatorship and guardianship proceedings. He is also a member of the firm’s Government Contracts and Construction Practice Group as well as the Government Contracts and Defense Industry Team.

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances.


The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2017.

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