Divorced federal employees, retirees, servicemembers, and veterans need to check their beneficiary designations in the wake of a recently overturned Virginia law.
The Virginia Supreme Court has overturned as unconstitutional a long-standing Virginia law that automatically changed beneficiary designations for life insurance policies after divorce (Va. Code Sec. 20-111.1). The Court’s decision applies to life insurance benefits for federal employees, veterans and military personnel.
The reason the law is unconstitutional is the doctrine of federal preemption of state laws under the United States Constitution’s Supremacy Clause. Also, the federal government has “sovereign immunity”, so that a state court can only make an order affecting federal benefits if Congress has specifically made a law allowing the states to do something with that benefit in a certain prescribed way. For federal and military pension Survivor Benefits, Congress has authorized states to do this in divorces, but when it comes to insurance, it has not. In fact, the federal statute creating and governing Federal Employees’ Group Life Insurance (FEGLI), in its section on designated beneficiaries, has a provision expressly preempting state legislation that conflicts with it.
The Virginia statute’s drafters anticipated the possibility of federal preemption of it, and so the statute specifically provides that if it is inoperable as to a particular kind of insurance because of federal preemption of the state statute, then the same net result between dueling insurance beneficiaries shall be achieved by using a “constructive trust” on the insurance proceeds, so that the person named as beneficiary must turn around and pay them to the person who otherwise would be the beneficiary. If you think that doesn’t exactly pass the smell test, and the state seems to be deliberately nullifying and undoing the actions of the federal government, the Virginia Supreme Court agrees with you. It points out, however, that it is joining a small minority position on this question: most states’ courts that have addressed the issue think such statutes are just fine. [NEWS FLASH: The latest is Hardy v. Hardy from Indiana's Supreme Court, March 14, 2012.]
The Virginia statute also applies to any kind of “death benefit”, such as designated beneficiaries of accumulated retirement contributions for employees and servicemembers who die before retirement. The court decision does not say anything about those other kinds of benefits. But federal employees and servicemembers would be wise to check and correct those beneficiary designations, too.
Two dissenting justices argued that the provisions of the FEGLI Act were designed to protect the federal government from getting entangled in disputes between rival beneficiaries, and NOT for the purpose of actually giving more benefits to divorced spouses instead of new spouses; and that therefore Virginia’s “preemption workaround” provision was perfectly constitutional, because it makes the divorced widows pay the benefits to the new spouses while keeping the federal government uninvolved.
On a practical level, unfortunately, neither way of deciding this issue is workable, fair or convenient for everybody. The Virginia statute is one of those laws that is designed to do for people by default what most people would choose to do if they attended to their affairs – to remove a divorced spouse from being the beneficiary except in cases where the separation agreement or divorce decree specifically says that they will stay the beneficiary. Many of our clients have rightly been told over the years that the law does this automatically, and have probably relied on it. On the other hand, many servicemembers, veterans, and federal employees have been told by the federal government over the years that they must change their beneficiary designation upon divorce if they want their insurance beneficiary to change. We have had people come to us whose deceased exes deliberately chose to do nothing about the beneficiary designation because they logically inferred, from all those federal warnings, that the beneficiary designation would change only if they changed it, and they wanted the ex-spouse to stay covered. So this is a case where either result would predictably lead to some injustice for quite a few people. But this is certainly the right result constitutionally.
And what we need to do about it is very clear: all federal employees, retirees, servicemembers or veterans who ever got divorced in Virginia or now live in Virginia should make sure that their beneficiary designations reflect their wishes, or their obligations under divorce decrees or agreements.
For more of the legal details see Richard Crouch’s case note about this case.