Protecting Life Insurance and Children After Divorce

The recent Supreme Court decision in Hillman v. Maretta on June 3, 2013, is indicative of the counterintuitive and confusing nature of divorce law with regard to life insurance. The Hillman case revolves around the Federal Employees Group Employment Act (FEGLIA), but has far reaching implication outside that context. FEGLIA states that a deceased federal employee’s life insurance proceeds shall be paid according to an “order of precedence,” the top spot belonging to a beneficiary designated by the employee.

Here is some factual background for the Hillman case. In 1996, Warren Hillman, a federal employee, named his first wife Judy Maretta as his beneficiary. However, Hillman divorced her two years later and when remarrying in 2002, he neglected to change his life insurance beneficiary from his ex-wife to Jacqueline Hillman, his new bride. Under FEGLIA, when Hillman died in 2008, his former wife Judy Maretta received $124,588.03 in benefits rather than his widow. Jacqueline Hillman sued to recover the benefits under a two-part Virginia equitable claims statue that revokes a divorced spouse as a life insurance beneficiary in favor of the current partner (Section A) and allows the family of the deceased employee to sue the designated beneficiary, in this case the widow, for the proceeds (Section D).

The Virginia law was intended to protect those who did not keep their designations up to date but soon became the subject of a wide-ranging legal battle. In a series of conflicting judicial decisions, the Fairfax County Circuit Court sided with Hillman while the Virginia Supreme Court decided the case in Maretta’s favor. Upon taking up the case, the Supreme Court ruled unanimously that the Federal Employees’ Group Life Insurance Act preempts Virginia state law, giving the benefits solely to Maretta. The Court rejected Hillman’s argument that Congress designed the order of precedence in FEGILA to simplify the payment of benefits by administrators, holding that both Section A and Section D were unconstitutional under the Supremacy Clause – a clause in the United States Constitution ensuring federal laws take precedence over conflicting state laws.

What does this mean for you? If you are a federal employee covered under FEGILA make sure you keep your designated beneficiary up to date. Remember, you have a right to change your beneficiary designation at any time without the knowledge or consent of the previous recipient. If you are covered by another provider, research the terms and conditions of your life insurance policy and the pertinent state laws. In many cases, state laws can be complex so it is best to retain an attorney.

Much in the same vein, if you currently have children from another marriage, you should include a QTIP trust provision in your estate planning to avoid any dispute which can place the fate of your loved ones in the hands of a judge and/or opposing counsel in a quagmire of regulatory nightmares and costly, protracted litigation. Such a provision serves to ensure that you can continue to provide for your loved ones after your death.

For example, assume that you have a valuable asset that is subject to probate and want to leave this asset to your kids. Without a QTIP, your surviving former spouse can make claim to your estate regardless of your wishes, and sometimes despite your will. This can at the very least, dilute the equity in your estate and might also have severe estate tax implications before it ever touches the hands of your heirs. With a QTIP, you can better protect your children and your legacy as you intended.

The above is not legal advice of course, but for general information purposes only. For legal advice, please call 301.279.8773 and make an appointment for a detailed consultation with one of our attorneys.