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Ex-Spouses May Still Inherit Certain Death Benefits

Posted Sunday, June 28, 2015 by John S. Palmer

The Washington Court of Appeals has rejected an estate’s attempt to recover retirement funds paid to the decedent’s ex-wife. Estate of Lundy (decided June 1, 2015) involved a husband and wife who divorced in 2009 after 25 years of marriage, but when the husband died in 2013, his ex-wife was still the beneficiary of his retirement account.

On the surface, it would appear the estate should win, because RCW 11.07.010 states that a retirement plan beneficiary designation in favor of a spouse is automatically revoked upon divorce.

However in the 2001 case Egelhoff v. Egelhoff, the US Supreme Court held that ERISA (the federal statute governing private retirement plans) requires plan administrators to pay benefits to beneficiaries selected “in accordance with the documents and instruments governing the plan” without regard to state law because ERISA specifically states that it “shall supersede any and all State laws insofar as they may…relate to any employee benefit plan.” Preempting state law permits plan administrators to simply pay benefits per the beneficiary designation on file without the burden of tracking and interpreting state laws.

The personal representative of the Lundy estate argued that Egelhoff did not prohibit the estate from recovering retirement benefits after they were distributed to the decedent’s ex-wife because she had waived any claim to the benefits in the divorce decree.

In response, Lundy’s ex-wife cited Carmona v. Carmona (2008) in which the Ninth Circuit reversed a state court decision permitting a surviving spouse to recover retirement benefits paid to an ex-spouse. It said the constructive trust the state court created in favor of the surviving spouse was an attempt to avoid ERISA’s preemption and anti-alienation provisions:

We conclude that Congress did not intend to permit the reassignment of surviving spouse benefits and, therefore the constructive trust remedy that the state court tried to impose is also preempted by ERISA. It may not be that all constructive trusts instituted by state courts, particularly those that seek to recover ill-gotten gains, will have a sufficient connection with or reference to an ERISA plan to trigger ERISA’s preemption provision.

But when a state court creates a constructive trust with the explicit purpose of avoiding ERISA’s rules, it too must be preempted.

The Lundy estate argued that its claim against the decedent’s ex-wife was still viable based on the 2009 US Supreme Court case of Kennedy v. Plan Administrator for Dupont Savings and Investment; although the court held that Egelhoff required the plan administrator to distribute funds to a decedent’s ex-wife, it said that it was not expressing any opinion as to whether the estate could assert a state-law waiver claim against the ex-wife based on a provision in the divorce decree in which the ex-wife waived her right to the funds.

The Court of Appeals said even if Kennedy permits a post-distribution waiver claim, the Lundy Estate failed to establish that any waiver existed; although the divorce decree awarded the retirement account to the husband, it did not “expressly disavow [the ex-wife’s] interest in the proceeds of the account as a beneficiary…Disclaiming an ownership interest is not the same as disclaiming future rights as a beneficiary.” It added that without an express written waiver, the estate would have to prove the ex-wife had performed “unequivocal acts or conduct evincing an intent to waive” which cannot be inferred from “doubtful or ambiguous factors” such as the fact that the parties did not have a close relationship after the divorce.

Writing a clear waiver of the right to inherit federally-regulated retirement or death benefits into a divorce decree is probably not a viable solution; in the 2013 case Hillman v. Maretta, the US Supreme Court held that the Federal Employees’ Group Life Insurance Act pre-empted a Virginia statute automatically revoking beneficiary designations upon divorce, because it frustrated Congress’ intent to ensure a federal employee’s named beneficiary received the proceeds. Of greater significance, the court said a section of the Virginia statute creating a right to recover death benefits paid to an ex-spouse was also pre-empted because “it accomplishes the same prohibited result by transforming the designated party into little more than a passthrough for the true beneficiary.”

In its Estate of Lundy decision the Court of Appeals said that “while Hillman does not directly control here [because it involved FEGLIA, not ERISA], it suggests the same outcome would be appropriate in this situation.” Therefore the best-and perhaps only-way to ensure that an ex-spouse does not inherit a retirement account or life insurance benefits after divorce is to simply change the beneficiary designations.

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