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New Supreme Court Case May Moot State Statute

Divorce lawyers may no longer rely on a Virginia statute that says that even if an ex-wife is still on the books as her ex-husband’s beneficiary, she cannot get his employee pension and life insurance benefits.

A new case from the U.S. Supreme Court dealt with a similar statute from Washington state. The high court ruled that the federal Employee Retirement Income Security Act of 1974, 29 U.S.C. Sect. 1001 et seq., preempted the state law, allowing the ex-wife to get the pension and insurance.

Virginia lawyers who have studied this new case, Egelhoff v. Egelhoff, said that the Virginia law likewise would be preempted by ERISA.

They cautioned that the Supreme Court case highlights the importance of making sure that divorce clients tie up loose ends after the final decree comes down, including making a change of beneficiary.

The Egelhoff case is available from Lawyers Weekly USA as LWUSA No. 9920326. The majority opinion was written by Justice Clarence Thomas.

No automatic revocation

The Virginia statute that would be affected, Virginia Code Sect. 20-111.1, says that for divorce decrees entered after 1993, if a divorced party dies with his pension contract still designating his former spouse as the revocable beneficiary for any death benefit, that designation “is revoked.”

By providing that the death benefit will not pass to a former spouse, but is paid as though the former spouse had already died, the statute has acted as a kind of fail-safe provision for spouses who neglected, post-divorce, the housekeeping detail of updating their beneficiary designations.

But its continued viability is suspect after Egelhoff, divorce lawyers said.

In that case, a man’s employer provided him with a life insurance policy and a pension plan both governed by ERISA. He and his wife divorced in 1994. Just two months later, the man died intestate following an auto accident, according to the Supreme Court opinion. The wife was still listed as the beneficiary under both the life insurance policy and the pension plan, and the plan paid her the life insurance proceeds.

However, the man’s two children from a previous marriage, his statutory heirs, sued the wife to recover the life insurance proceeds and the pension benefits.

The children cited a Washington statute that said the designation of a spouse as the beneficiary of a nonprobate asset – including a life insurance policy or employee benefit plan – is revoked automatically upon the divorce. With the beneficiary designation revoked, the statute directed that the asset should pass as if the former spouse had died at the time the divorce decree was entered.

Under ERISA’s preemption provision, the federal statute supersedes state laws that relate to employee benefit plans. The children’s suits pitted the federal statute, which designated the former wife as the beneficiary in the man’s ERISA plan documents, against the state law, which made the children the statutory heirs.

Ultimately, the Supreme Court of Washington held that the Washington statute, although applicable to employee benefit plans, does not “refer to” or have a “connection with” an ERISA plan, and that it would not be preempted by ERISA.

But the U.S. Supreme Court held that the Washington statute bound plan administrators to a particular choice of rules to determine beneficiary status, and that this “impermissible connection” meant that ERISA preempted the state statute. The former wife won.

Virginia statute questioned

Several lawyers familiar with either divorce or ERISA law said that a federal court would find fault with Virginia’s statute too, and likely hold that the Virginia statute would no longer control distribution of benefits in a similar case in the commonwealth.

“It’s a pretty safe prediction that our statute is preempted too,” said Richmond lawyer C. Richard Davis. People can no longer assume that if a divorced spouse does not want a prior beneficiary to get the money, that Virginia’s automatic-revocation statute will kick in at the time of divorce. Divorced spouses should “take the affirmative step of making sure the correct person is designated.”

Lawyers who do estate planning may be familiar with the twists and turns that can arise when someone dies suddenly, with no planning. But family law practitioners may not be in the habit of recommending estate planning.

“The first time the [pension] issue came to my attention was in a prenuptial agreement,” said Richmond lawyer Edward D. Barnes. “Everybody signed off before the wedding,” and the prenup provided that if there was any effect on the husband’s ERISA benefits, the plan documents would have to be signed.

Egelhoff serves as a “warning to people to look at their plan documents and be clear about what will happen,” Barnes said. The result under those documents “could be fairly surprising to the family of a decedent.”

“Don’t go forth with any assumptions about what your documents say. This really is a call to be diligent in looking at plan documents,” Barnes said.

ERISA preempts state law, but not necessarily any individual agreement, for instance a prenup, Barnes said, citing the “savings clause” of the Virginia statute.

Fairfax lawyer Richard J. Byrd also has seen the beneficiary-designation dilemma up close.

Some years back, a young couple in their 30s divorced. There were no children, and it was a simple split, but the wife never got around to changing the beneficiary on her employee benefit plan. When she died several years later, her employee benefit plan dropped $180,000 on the husband. The deceased wife’s family protested, but the plan documents dictated that the husband got the money, Byrd said.

Questions remain about a waiver of the beneficiary designation in the wake of Egelhoff, Byrd said. What will it take to waive any right an ex-spouse may have under a prior designation? Can a court rely on a boilerplate waiver of “any and all rights” to the other party’s property, now or in the future, or does the waiver have to be specifically tailored to the particular ERISA-governed benefit at issue?

Lawyers who advise plan administrators say Egelhoff is a help.

“The goal is to have clear rules so plan sponsors will be able to say the beneficiary designation is who it is in the documents, regardless” of what a particular state statute says, according to Richmond lawyer Marie D. Carter.

“Divorce lawyers may have been relying on the Virginia statute, and not paying attention to every beneficiary designation that’s out there,” she said. But the Virginia statute likely still would apply for designation of a beneficiary for an IRA, or individual retirement account, she said.

“Uniformity benefits plan participants as well as plan sponsors,” Davis said. The plan administrators “can deal with all plan participants the same way, wherever they live at the time of the distribution.”

Barnes recommended that, as part of the closing-the-file checklist, a divorce lawyer should remind the client to do the necessary estate planning, including taking care of the simple things — like just changing beneficiary designations.

And it is not just divorce lawyers who should know about the ruling related to the Virginia statute, Davis said.

“Businesses probably need to be put on notice too” of this change in the controlling law, he said. Otherwise, an unwary plan administrator could unwittingly pay out benefits under the authority of Virginia’s automatic-revocation statute.

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