Supreme Court Holds That State Statute Providing for Revocation of Former Spouse as Life Insurance Beneficiary Is Preempted by ERISA. (Recent Court Decisions)

Article excerpt

Egelhoff v. Egelhoff, 532 U.S. 141,121 S.Ct. 1322,149 L.Ed. 2d 264 (U.S. Supreme Court--March 21, 2001)

A State of Washington statute provides that the designation of a spouse as the beneficiary of a nonprobate asset is automatically revoked by operation of law upon divorce. The statute and its applicability to life insurance provided by an employee benefits plan subject to ERISA (the Employee Retirement Income Security Act) became the subject of the U.S. Supreme Court's latest foray into the field of ERISA preemption. The Court found that the state statute preempted under the circumstances of the case, notwithstanding that distribution of marital assets is a traditional state function not ordinarily regulated by the federal government.

Donna Rae and David Egelhoff were once married. David was an employee of Boeing, the large aircraft manufacturer, which provided him with both a life insurance policy and a pension plan. Because these were employer-provided benefits plans, they were governed by ERISA. In April 1994, the Egelhoffs divorced. David was in a car accident two months later and died within months, creating the dispute that led to this decision.

At the time of David's death, Donna Rae continued to be the listed beneficiary under both the life insurance policy and the pension plan. The life insurer paid her benefits of $56,000. David's children from a prior marriage (and his heirs under the state intestacy statute) sued Donna Rae in Washington state court seeking to recover the life insurance proceeds. They based their claim on Wash. Rev. Code [section]11.07.010(2)(a)(1994), which provides:

If a marriage is dissolved or invalidated, a provision made prior to that event that relates to the payment or transfer at death of the decedent's interest in a nonprobate asset in favor of or granting an interest or power to the decedent's former spouse is revoked. A provision affected by this section must be interpreted, and the nonprobate assets affected passes, as if the former spouse failed to survive the decedent, having died at the time of entry of the decree of dissolution or declaration of invalidity.

The statute defines "nonprobate assets" to include life insurance policies and pension benefits.

In other words, former spouses cease being beneficiaries for these types of assets to protect against a former spouse unwittingly leaving this property to an ex-spouse simply because of a failure to remember to change the beneficiary. If an ex-spouse wishes to leave this sort of property to the other ex-spouse, the statute is designed to force a new beneficiary designation so that property is not unwittingly given to a former spouse who is now the object of enmity rather than affection. Similarly, as one might intuit from the suit of the Egelhoff children, the statute seeks to reduce the possibility that a former spouse will receive funds that the decedent ex-spouse might well have preferred go to his or her children.

The Washington courts, including the state supreme court, found for the Egelhoff children and against Donna Rae, who had raised a defense of ERISA preemption to the suit, arguing that the state law could not govern the federally regulated Boeing employee benefits plan. ERISA provides in part that any state law "relating to" a covered benefits plan is preempted. The Washington Supreme Court found no preemption, holding that the statute was not sufficiently connected to the ERISA plan and that the statute did not substantially interfere with the operation of ERISA plans to warrant preemption. See In re Estate of Egelhoff, 93 Wash. 2d 557, 989 P.2d 80 (1999). Courts had divided over the issue, prompting the U.S. Supreme Court to consider the issue. Compare Emard v. Hughes Aircraft Co., 153 F.3d 949 (9th Cir. 1998) (finding, like Washington Supreme Court, that there is no ERISA preemption) with Manning v. Hayes, 212 F.3d 866 (5th Cir. 2000) (finding preemption); Metropolitan Life Ins. …