Monday, May 6, 2013

US Supreme Court will rule on this: Who gets a deceased federal employee's life insurance proceeds, his wife or his designated beneficiary, who happened to be a long-ago divorced ex-wife?

I was plenty busy with the same-sex marriage cases and the Indian Child Welfare Act case, so I'm just now catching up on another case the Supreme Court will resolve by the end of June. It's Hillman v. Maretta, a case raising some very interesting questions, which was argued last month on the last day of this Term.

The facts are simple.  Warren Hillman worked for the federal government.  In 1996, he named his wife, Judy Maretta, as the beneficiary of his federal life insurance policy.  This employee benefit dates back to the Eisenhower years and was designed to enable employees to carry out their responsibilities to their families and to make the federal government competitive with the private sectors for good employees. The couple divorced in 1998, and Hillman remarried in 2002.  He was still married to that wife, Jacqueline Hillman, when he died in 2008.

Warren Hillman never changed his beneficiary.  Therefore, his life insurance proceeds, almost $125,000, were paid to Maretta.  At this point Virginia state law kicked in.  Virginia has a statute that wipes out designations to former spouses upon a divorce, unless the designation is reaffirmed after the divorce.  Another way of saying this is that Virginia assumes that people don't want their ex-spouses to get their property, financial accounts, or any other benefit.  Rather than require people to change desginations they made during the marriage, the law wipes them out all at once.

Virginia law cannot trump federal law because of the doctrine of preemption.  So federal life insurance proceeds still go to whoever is designated by the employee.  No one disputes that this Virginia statute cannot change who the insurance plan administrator pays the benefits to.  But...another Virginia law gives someone who would get the benefit if the Virginia law did wipe out the designation the right to sue the designated beneficiery and get all the money from her.  That's the law being challenged in this case.

The way the widow Jacqueline Hillman sees it, the Virginia law doesn't interfere at all with how the plan is administered.  It's simply gives a family member an equitable remedy under state law to effectuate what the state presumes is the intent of its divorced residents.  She also points out that federal law explicitly says life insurance proceeds for members of the military are not subject to creditors, evidence that Congress wanted to make sure the designated beneficiary got to keep the money.  But nonmilitary federal life insurance doesn't have that same provision.  So she argues that the federal statutory scheme does not preempt a state law that effectuates the presumed intent of the deceased employee.

Ex-wife Judy Maretta argues in response that the Virginia statute is a backhanded way of accomplishing what everyone agrees Virginia cannot do directly -- require the plan administrator to pay proceeds to anyone other than the designated beneficiary.  She also notes that the handbook for the program given to federal employees specifically says that divorce does not revoke the beneficiary designation to a former spouse.  Congress has amended the relevant statute once when it comes to paying proceeds to someone other than the designee, and that is when a properly crafted order from a divorce court awards the proceeds to someone else.  If the order is filed with the plan administrator before the employee dies then the plan pays according to the order.  (This overcomes the problem that a spouse might get a share of the life insurance proceeds as part of an overall property settlement but the employee might fail to make a beneficiary change in line with the settlement; the way this works in practice is that the lawyer for the spouse who got the settlement will make sure the order goes to the plan administrator.)  The federal government agrees with Maretta.

Okay, so here is what interests me about this case. In my world, a victory for a designated beneficiary is a good thing.  If the employee doesn't name anyone, the proceeds you would a surviving spouse (e.g. Hillman), and if there isn't one, to -in order- children, grandchildren, parents.  Since a default order of preference never includes an unmarried partner or others closest to the deceased but not on the traditional list, I wholeheartedly support allowing individuals to decide for themselves who receives a benefit. The fact that this benefit has always allowed the employee to designate a beneficiary means that, even though providing for their families was one reason expressed for first offering life insurance as a benefit, there was always the idea that the employee could select anyone and that selection would be honored.

But. On the other hand, we want a person's real intent to govern.  When an Oklahoma man's will leaving his property to his life partner was successfully challenged by distance relatives because it lacked one of the required witness signatures, that was an outrage.  Since providing for their families was one of the reasons for this benefit, it seems like the person living in an economically interdependent relationship with the deceased should actually have a leg up.

The federal government doesn't care at all about intent. It wants the plan administration to be simple.  Look at the forms.  See whose name is there.  Pay the benefit.  That is the very definition of simple.  Hillman says the federal government gets to do what is simple; only after that does state law kick in and let her recover the funds from Maretta, and that shouldn't concern the feds because they play no role in that lawsuit.

The underlying Virginia law that wipes out all designations of a spouse after divorce (unless reaffirmed) makes some sense since it is reasonable to think that most people ending a marriage think the divorce has settled all their future economic obligations.  If that is the proper default rule, designed to effectuate real intent, then it seems like Virginia has come up with a straightforward way of making that happen without disturbing the simplicity the feds need to efficiently operate the plan.

So I'm back and forth on this one.  Ultimately, however, I come down on Maretta's side.  Preserving the name the employee put on the document is the best way to know that we all get to choose whomever we wish, including nonmarital partners; close friends; specific favored relatives; and, yes, even ex-spouses (who can certainly sometimes remain close friends).  Until the default list adds, at the very least, a cohabiting, economically interdependent, nonmarital partner, it's not a list that does a good enough job implementing the deceased's intent...or providing for his or her family.

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