Federal Law on Beneficiaries Overrides State Divorce Rules

MARCH 26, 2001 VOLUME 8, NUMBER 39

Assume that Mr. and Mrs. Smith, happily married, sign wills leaving all their assets to one another. Some years later their marriage fails, and the Smiths divorce. Will their old wills still be valid?

Arizona, like many other states, has a provision that effectively revokes Mr. and Mrs. Smith’s wills. Each is treated as having died before the other, so whatever alternate provisions they have made will take effect instead. This seems fair and proper; we can assume that Mr. and Mrs. Smith no longer wish to leave everything to each other if they no longer live together. In fact, Arizona law goes further, and provides that the Smiths’ designation of life insurance beneficiaries, joint tenancy and other substitutes for wills are also invalidated.

Washington state law is similar, and so the results in that state should be about the same. If Mr. and Mrs. Smith (or, in the case offered for our current review, Mr. and Mrs. Egelhoff) get divorced, any designation of joint ownership or beneficiary designation is automatically revoked.

Donna Rae and David A. Egelhoff were divorced in 1994. Mr. Egelhoff was an employee at the Boeing Company, and had a company pension and life insurance policy. Both named his wife as beneficiary. Mr. Egelhoff was killed in an automobile accident two months after the divorce, before he had gotten around to changing the beneficiary designations.

Mr. Egelhoff’s two children from a prior marriage pointed to the Washington statute, and argued that they should receive both the life insurance and the pension benefits. The problem: both plans were covered by the Employee Retirement Security Income Act of 1974, popularly known as ERISA.

Most employer-provided plans that include pension and life insurance benefits are governed by ERISA. In order to protect workers from state variations, ERISA expressly provides that state law is ineffective in any attempt to determine ownership rights in the plans. The so-called “pre-emption” provision of ERISA overrides any state law to the contrary.

But, argued Mr. Egelhoff’s children, the Washington law did not really affect ownership of the retirement plan and life insurance. The Washington State Supreme Court agreed, and ordered the benefits paid to the children. Mrs. Egelhoff appealed to the United States Supreme Court.

Last week the U.S. Supreme Court overruled the state courts and ordered that the proceeds belonged to Mrs. Egelhoff. Mr. Egelhoff could have changed the beneficiary designations, but he would have to have done so in accordance with the strict provisions of the retirement plan and federal law. Washington’s state law (and almost certainly Arizona’s as well) failed to protect Mr. Egelhoff’s children from his failure to make the formal change. The Court’s holding only applies to benefits plans covered by ERISA, but since most retirement plans and company life insurance benefits are covered the effect is far-reaching. The state law that automatically rewrites a divorcing couple’s wills is still valid, but not necessarily the provisions relating to life insurance and pension rights. Egelhoff v. Egelhoff, March 21, 2001.

3 thoughts on “Federal Law on Beneficiaries Overrides State Divorce Rules”

  1. Martha McMonagle

    I found this VERY interesting. I live in Pennsylvania, and was in the middle of divorce, where grounds had been established. Although we had filed, after grounds had been established, my husband and I did nothing to further things along for 2 years. During that Time, my husband died. I have been left as sole beneficiary to his Boeing 401K, yet his estranged children, and divorce attorney, are claiming that according to State law, and because grounds were found, that I am not entitled to that 401K, and that a judge will order me to pay back the to the estate, that money that he left me.

    I realize that you are based in Arizona, but have been searching for attorneys who have dealt with similar situations, and am looking for advice. I have contacted Boeings legal department, and they claim that they have followed the law to the letter, and that I am the sole beneficiary, and that the money belongs to me.
    I would greatly appreciate any feedback you can give me on this situation.

    Thank you,
    Martha McMonagle

    1. Martha:

      You should contact an experienced attorney in your state. You can find practitioners who know a thing or two about ERISA and beneficiary designations at the American College of Trust and Estate Counsel (www.ACTEC.org) or the National Academy of Elder Law Attorneys (www.NAELA.org). Both maintain a look-up tool to find practitioners who are geographically convenient for you. For this kind of question, we’d probably suggest you try ACTEC first, but NAELA members could be very qualified in the area.

      Good luck!

      Fleming & Curti, PLC
      Tucson, Arizona

  2. Pingback: Divorce Decree Modifies Life Insurance Beneficiary Designation - Fleming & Curti PLC

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