Monday, June 16, 2014

A Little Mistake Can Upset an Insurance Plan: Take Time in Mediation to Consider Insurance and Beneficiary Designations

Prominent Michigan family law attorney Carole L. Chiamp, who is of counsel to our firm, is a family law court-approved mediator. She is among the first attorneys in Michigan to obtain this designation. She currently authors a monthly article in the Michigan Family Law Journal entitled "Mediation Matters."  

“I’ve had bad luck with both wives.  The first one left me and the second one didn’t.”
- Patrick Murray
Although standard life insurance provisions in divorce judgements are required by Michigan statute,  it is imperative to know that state law cannot override provisions in federal employees’ life insurance policies when it comes to naming beneficiaries.  The United State Supreme Court recently reminded us of this rule in the case of Hillman v Maretta, 569 U.S. ____ (2013).  Mr. Hillman had been married three times.  He changed his insurance beneficiary to wife #2 Maretta to whom he was married for two years.  He divorced her and the divorce judgment contained the standard language barring her from taking life insurance proceeds. He married wife #3.  He retired.  They traveled together.  He changed his will leaving everything to wife #3.  Then he died.
The court in Hillman decided unanimously that the Federal Employees’ Group Life Insurance Act (FEGLIA) mandates that life insurance proceeds of federal life insurance policies be paid to the designated beneficiary(ies) regardless of the actual intent of the insured party. Wife #3 lost.  The $125,000 in life insurance proceeds went to wife #2.

The case originated in Virginia but it could just as easily have happened in Michigan where the law is the same.  State law in both Virginia and Michigan allowed the new spouse to sue the ex-spouse for return of the proceeds.  It made no difference. Pursuant to FEGLIA, life insurance proceeds must be paid according to “an order of precedence” that gives priority to designated beneficiaries.  The court held that the insured employee’s designation of a beneficiary should be treated as conclusive evidence of intent.

A number of writers believe ERISA and other federal benefit programs will fare similarly.  According to Winston and Strawn LLP:

“Although the Court’s decision focused on the language and purposes of FEGLIA, Maretta is likely to bear on similar preemption questions that arise under other benefit programs, such as ERISA and FEHBA.  For example, Kennedy v Plan Administrator for DuPont Savings & Investment Plan, 555 U.S. 285 (2009), left open the question whether ERISA preempts post-distribution state law claims by the decedent’s estate against a former spouse who receives ERISA benefits despite language in a divorce decree waiving such benefits.  Cf. Boggs v Boggs, 520 U.S. 833, 853 (1997) (“If state law is not pre-empted, the diversion of retirement plan or the recipient regardless of whether the interest in the pension plan is enforced against the plan or the recipient of the pension benefit”).  The Court’s conclusion that preemption turns on a practical view of the effect of law could have a significant effect on these cases, which continue to perplex the lower courts.”

The designation or re-designation of beneficiary should be thoroughly discussed in mediation and responsibility for change of beneficiary, if agreed upon, should be absolutely clear when coming to a settlement.  This can be done in a number of ways, including clearly stating it in the judgment and sending a letter of instruction to the appropriate department of government, and/or obtaining an appropriate form to make the change and returning the form.

This is of course easy to say.  Hillman should have kept his beneficiary designation up to date.  Unfortunately he was only human and forgot to do it.  Justice Samuel Alito at oral argument engaged in a bit of gallows humor and opined “State domestic relations law leads to a lot of nasty and difficult disputes - you know ‘Bleak House’.” He wondered whether Congress believing that tried to simplify the beneficiary process by requiring that the insured’s beneficiary be conclusive.  He also elicited laughter when he said no one had ever reminded him, in his many years on the bench, to update his beneficiary form. (See footnote 1).

Sometimes an insurance policy is used to secure child or spousal support.  The judgment calls for the policy to be used as “security only”.  Since the policy designates the children and/or former spouse until it is no longer needed as security, the change of designated beneficiary is not executed immediately.  It is then forgotten.  The insured remarries and then dies.  The war of the spouses begins again.

These serious and costly problems can  be avoided if attorneys and clients learn from Hillman that estate plans must be kept up to date and that means more than executing a new will.  It means following through with all beneficiary designations.    

 1.  Diana Rees, Writing for the People, April 25, 2013.  Reese is a journalist in Over Park, Kansas.  Twitter @dianareese, accessed October 26, 2013.

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