As always, before reading this post please review my disclaimer by following the above link or by clicking on this link. As always, any legal principle discussed apply only to the Commonwealth of Virginia.
Introduction
Lawyers tend to live in a little bit of a fantasy world regarding our clients. Our clients, we like to believe, are "perfect" when it comes to protecting themselves under the law. They update their wills every time there's even the slightest change warranting an update, they are always on top of their finances, and nothing is even let go by for a day.
Of course, this is a fantasy, and reality is that most people who aren't lawyers really don't have time to be obsessing over life's relatively minor legalities. So, let me present you with a scenario we see all the time in family law. John and Suzanne get divorced. Two months later, John and Betty get married. Two months after that, John dies. At the time of John's death, he has not updated his will, or his beneficiary designations. He has a will, life insurance policy, retirement account, etc. that all say "everything goes to Suzanne." Given the divorce, and John's remarriage, we know this was probably not what he wanted to have happen. So, what now?
In today's blog post, I will cover some of the legalities that occur if a divorced spouse dies without having updated legal documents designating his or her ex as his or her beneficiary. The ultimate conclusion will be simple - update your designations! Nonetheless, it is worth understanding the "default," in case you find yourself in a situation beyond your control.
General Rule
The general rule, as laid out by the Code of Virginia, is that your divorce automatically revokes all will designations and beneficiary designations of your ex-spouse. Period, end of story. Instead, the will, life insurance policy, etc. is required to act as though the ex-spouse died before you did. Of course, practice is not that simple. For example, what if the insurance company doesn't know about your divorce and pays the money to your ex-spouse anyways? That is where the rules get tricky.
Wills
Wills are probably the easiest topic in this area. The effect of a divorce on a will is laid out in Va. Code Section 64.2-412. Under that section, as stated in the general rule, the will is now executed as though your ex had pre-deceased you. While this may seem ideal, think about what this really means. What if John's will says "everything goes to Suzanne, but if she dies before me, it goes to my brother, Bob." Well, under the law, now John's estate will go to Bob, not Betty. In real life it's not quite that simple because of something called the "elective share," but I'm not going to get too into estate law here, so just know that if John wanted his whole estate to go to Betty, by not updating his will, his wishes still will not be followed, even though his estate will not go to Suzanne.
Life Insurance, Retirement Accounts, etc.
For life insurance, retirement accounts and other finances that are payable on death to your designated beneficiary, Va. Code Section 20-111.1 applies. That section also enacts the general rule. Specifically, your ex is to be treated as though he or she died before you. There is a big caveat however. It is your responsibility to notify the insurance company, financial service provider, etc., of the divorce. If the company pays out to the ex-spouse because it is not aware of the divorce, Va. Code Section 20-111.1(A) specifically exempts the company from liability for the improper payment. As a result, that money is gone, and is not coming back.
So, it is critical that you inform the company of the divorce. If, however, you are already going through the trouble of informing the company, wouldn't it be worthwhile to just go ahead and change your beneficiary designation? Unless the company restricts the times that you can do so, the amount of time involved is going to be similar, and it will result in much less confusion later.
Alternative Orders
There is an exception to the general rule which is also worth noting. If the order granting the divorce itself states that the will or beneficiary designation will survive the divorce, then it does survive the divorce. Now, it is practically unheard of for a judge to make such an order, so the practical effect of that exception is that it gives you the right, when trying to settle the divorce, to negotiate a result other than the general rule. This is just one more thing to think about when you are trying to find areas in which you can reach a compromise.
A Special Twist: Federal Life Insurance
As an attorney, it's always fun when a case from your local court ends up at the U.S. Supreme Court. In my case, this happened most recently with the Court's 2013 case of Hillman v. Maretta, which started in the Fairfax County Circuit Court with a ruling by Judge Michael Devine, for whom I have a great deal of respect. Now, this relates to our topic, because this case involved an issue that rarely comes up anywhere except in the DC area - what about life insurance provided by the federal government for federal employees?
Federal Employee Group Life Insurance (FEGLI) is a benefit offered to federal employees to get life insurance without a medical exam and while paying a much lower premium than they would if they were to get insurance on their own. Life insurance is not an uncommon benefit offered by large employers, and the federal government wants to compete with large employers for the best employees, so that led to the establishment of FEGLI. However, as the federal government is not a "normal" employer, it had to have authority to create FEGLI, so Congress passed the Federal Employee Group Life Insurance Act (FEGLIA) to establish FEGLI. A key component of FEGLIA is U.S. Code Title 5, Section 8705 which designates the order in which FEGLI is distributed. Title 5, Section 8705(a) states that the first person to whom the money is sent is the "person designated by the employee," and then has a linear list of who goes next if that person pre-deceases the employee.
Well, you might be asking why this all matters? If you remember your middle school civics, however, you might have an idea. Specifically, federal law trumps state law, and while Virginia state law says that the designation becomes invalid, it cannot supersede federal law, and FEGLIA has no provision regarding divorce.
Anticipating this problem, the General Assembly passed Va. Code Section 20-111.1(D) which stated that if 20-111.1(A) is "pre-empted" (meaning does not apply due to a contrary federal law), then the money does go to designated ex-spouse, but then the person who would have gotten the money had 20-111.1(A) applied can sue the ex-spouse for that money.
Hillman v. Maretta dealt with exactly this situation. Warren Hillman designated his wife, Judy Maretta, as his FEGLI beneficiary in 1996. In 1998, Hillman and Maretta divorced. In 2002, Hillman re-married. In 2008, Hillman died, having never updated his FEGLI designation. As a result, Maretta claimed the $120k+ life insurance policy on Hillman, and Jackie Hillman sued Maretta for that amount under Va. Code Section 20-111.1(D). The trial court ruled that while 20-111.1(A) was pre-empted by FEGLIA, 20-111.1(D) was not, so it ruled in favor of Hillman. The Virginia Supreme Court disagreed, and ruled in favor of Maretta, so Hillman appealed to the U.S. Supreme Court. The U.S. Supreme Court also agreed with Maretta, and ruled that Va. 20-111.1(D) conflicts with the purpose of FEGLIA and is therefore pre-empted as well. As a result, Maretta got to keep the money.
This can be confusing because 20-111.1(D) is still on the books, even though we know now it is unenforceable. The key takeaway, though, is that if you are a federal employee, you must change your FEGLI designation. The law will not do it for you.
Conclusion
When we divorce, we often don't think about things like wills and life insurance - but they remain critical pieces of our lives that need to be addressed. One of the first things you should do after a divorce is re-write your will and change your beneficiary designations to prevent later issues. Nonetheless, if you find yourself in a conflict relating to a divorce and death benefits, please feel free to call (703)281-0134 or e-mail SLeven@thebaldwinlawfirm.com to set up a consultation. Our initial consultations are free for up to half an hour!
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