Elder law and estate planning — which is what we practice at Fleming & Curti, PLC — doesn’t usually include divorce and family law issues. Sometimes, though, the two practice areas overlap. As, for instance, when a divorce decree effectively changes an estate plan.
Before we tell you our story this week, we need to explain something about ERISA — the Employee Retirement Income Security Act of 1974. ERISA regulates a slew of principles governing retirement plans and employee benefits. Does your employer offer a retirement plan? It’s probably an ERISA-covered plan. Do they offer you insurance benefits — including life insurance? Again, ERISA.
One key element of ERISA is that it overrides almost all state laws which might otherwise affect retirement benefits. Why do they have such a strong position regarding state laws? In order to make sure that insurance companies have an easier time figuring out the rules. The thinking is that there will be many more retirement plans and benefits if the providers don’t have to keep track of 50+ different state and local systems.
That principle translates into the ERISA preemption doctrine. Does your state law direct that retirement benefits get divided on divorce? Unless ERISA’s own rules are followed, the state law will not apply. Does a divorce automatically rescind beneficiary designations under your state’s law? Not so fast — we have to look to ERISA rules before any change is effected.
ERISA does permit a state divorce court to divide even retirement assets. But in order to be effective, the divorce decree must be a “Qualified Domestic Relations Order” — a QDRO. If the divorce decree does not meet the ERISA rules, it will be ineffective.
Bruce Jackson’s life insurance policy
With that background, let’s consider Bruce Jackson. The Ohio resident worked at Samaritan Health Partners, and they offered a life insurance policy to employees. He signed up in 2003; he named his uncle Richard as beneficiary on his policy.
Bruce was already married, and the father of a young daughter. Shortly after he started his new job, Bruce and his wife got divorced. The couple’s divorce decree ordered Bruce to name their daughter as beneficiary on his work-related life insurance policy, at least until she was 18 (or graduated from high school). The judge signed their divorce decree in 2006.
As so often happens, Bruce never got around to changing his life insurance beneficiary. When he died in 2013, the policy still named his uncle Richard as beneficiary.
His daughter’s lawyer sent a copy of the decree to the insurance carrier, Sun Life Assurance Company. The lawyer tried to make clear that Bruce’s daughter should be the beneficiary on the policy. Sun Life, however, decided that the divorce decree was not a QDRO, and they distributed the life insurance payout to uncle Richard.
Worried about whether they made the right decision, Sun Life filed a federal court case to determine the proper beneficiary. The federal judge ruled in favor of Bruce’s daughter, and Sun Life appealed the decision.
The Court of Appeals ruling
The Sixth Circuit Court of Appeals agreed with the federal court judge. The appellate court acknowledged that the rules governing ERISA plans are precise. The Jacksons’ divorce decree would only be effective if it met the standards of a QDRO. But ERISA allows a decree to qualify if it “clearly specifies” several key elements.
The Court of Appeals ruled that Sun Life could figure out the decree. It clearly identified the beneficiary, the share she was entitled to receive, and the length of time it was applicable. Sun Life received a copy of the decree before they made their decision. Bruce’s daughter should have received the payout. Sun Life Assurance Company of Canada v. Jackson, December 22, 2017.
Two other things stand out from the Court of Appeals decision in this case:
- Little is said about poor Richard Jackson. He received the life insurance payout improperly. Will he have to repay it? Will Sun Life seek its return, even though they were the ones who wrongly sent it to him?
- The decision includes a charming sports story to help describe what is meant by “clearly specify” — but without expressly saying what is being specified. The court’s metaphor is worth repeating, but first recall that the Sixth Circuit sits in Cincinnati, Ohio:
“So too of a sports fan asked this question: Who is the greatest basketball player of all time: Michael Jordan or LeBron James? He might respond “LeBron James,” which clearly specifies the answer. Or he might respond “Number 23,” which does not clearly specify the answer. But if he responded “Number 23 of the Cleveland Cavaliers,” no one would be confused. The sports fan did not state “LeBron James.” But he did specify him. And clearly so.”
What is the larger message?
What can we learn from the Sun Life v. Jackson decision? The key points, which we repeat regularly: pay attention to beneficiary designations, and follow up when you have life changes (like a divorce).
Did Bruce Jackson mean to leave his uncle as beneficiary on his life insurance? Or did he just forget to take care of things after his divorce? Did his ex-wife intentionally leave the beneficiary designation to chance? Clearly, the beneficiary designation did not comply with the divorce decree.
Way too much of Bruce Jackson’s insurance proceeds went to lawyers. Don’t let that happen to your estate plan. A modest initial investment in estate planning can save much more expense later.