Retirement plans and life insurance and annuities often constitute a large portion of a client’s estate. At death, these plans are distributed by beneficiary designation, not by the client’s Will or trust.
Many clients are aware that under California law (unless a Will specifically provides otherwise) bequests made to the former spouse in a Will that was made prior to the divorce are revoked at the time the dissolution becomes final. In addition, some beneficiary designations naming the former spouse are automatically revoked upon divorce; but that is not always the case. For example, there is no such automatic revocation of beneficiary designations for retirement plans that are covered by ERISA. For an extended discussion of the effect of California law on the inheritance rights of a former spouse see the following Death and Divorce Blog.
Many states have laws similar to those of California revoking bequests and beneficiary designations upon divorce. However, the state law providing for automatic revocation of beneficiary designations cannot always be relied upon in cases where federal law trumps (preempts) state law. This was highlighted this month in a new U.S. Supreme Court case, Hillman v. Maretta (2013) 133 S. Ct. 1943. Mr. Hillman had named his first spouse as beneficiary of a life insurance policy. He and the first Mrs. Hillman then divorced, and Mr. Hillman subsequently remarried. Mr. Hillman did not change the beneficiary designation on his life insurance. Although state law (of Virginia, Mr. Hillman’s state of residence) provided that the beneficiary designation naming the former spouse was revoked upon divorce, because the life insurance policy was governed by federal law, the Supreme Court held that the former Mrs. Hillman, as the named beneficiary, was entitled to the policy proceeds. (This was the ruling despite the fact that Virginia law gave Mr. Hillman’s estate a separate right to sue for the policy proceeds in situations where federal law pre-empted the state law of automatic revocation.) For a further discussion of the case, see Deborah J. Jacobs’ article “Supreme Court Favors Ex-Wife Over Widow in Battle for Life Insurance Proceeds.”
The Bottom Line: Be sure to review and update your beneficiary designation forms for retirement accounts, life insurance, annuities, and any other asset that passes by beneficiary designation on a regular basis, especially upon divorce or any other change in circumstances.