A 2013 decision by the U.S. Supreme Court illustrates the importance of updating beneficiary forms regularly. If you don’t, your desired heirs can lose a valuable asset. This case, Hillman vs. Maretta, had its genesis in 1996, when Warren Hillman married Judy Maretta. Warren was a federal employee, so he named Judy as the beneficiary of his group term life insurance policy. The couple was divorced after two years, and Warren subsequently married Jacqueline. Warren and Jacqueline were still married in 2008 when Warren died; that life insurance policy’s death benefit was nearly $125,000. As it turned out, Warren had never changed the beneficiary designation on the policy. Thus, Judy received the death benefit, and Jacqueline went to court to get the money from Judy.
State versus federal
The case took place in the state of Virginia, which has passed a state law saying that a divorce or annulment revokes a beneficiary designation relating to death benefits. That sounds like it should have settled the matter, but Warren’s life insurance policy was created under the Federal Employees’ Government Life Insurance Act (FEGLIA), a federal law, and the U.S. Constitution states that federal law will trump state law when there’s a conflict. Nevertheless, Jacqueline still had a card to play. Virginia has another law saying, in essence, that if death benefits are turned over to a former spouse because of such a conflict, that former spouse is liable for the amount in question, payable to the person who otherwise would have collected. Thus, Jacqueline (Warren’s widow) sued Judy for the amount of the insurance proceeds.
Did federal law override state law, giving the life insurance benefits to Judy? All parties agreed that was the case. But did the second Virginia law prevail, allowing Jacqueline to ultimately collect the death benefits from Judy? That was the question dividing the Virginia courts and bringing the matter to the U.S. Supreme Court. In 2013, the Supreme Court decided Hillman vs. Maretta in favor of Judy, the former spouse and the designated beneficiary. “FEGLIA establishes a clear and predictable procedure for an employee to indicate who the intended beneficiary shall be,” the Supreme Court noted, so federal employees have an “unfettered freedom of choice in selecting a beneficiary and to ensure the proceeds actually belong to that beneficiary.”State law can’t overturn that federal law’s intent, the Court ruled. Not every case will come down in favor of a former spouse. ERISA, a federal law covering retirement plans, gives a current spouse certain rights to death benefits from an employer’s retirement plan, unless that right has been formally waived. Nevertheless, beneficiary conflicts can be time consuming, expensive, and stressful, especially if large amounts are at stake. Regularly updating all beneficiary forms can spare your loved ones from fighting what might wind up being a losing battle.