U.S. Supreme Court to Hear Case on the Validity of Virginia’s Anti-Preemption Statute

On January 11, 2013, the U.S. Supreme Court granted the petition in Hillman v. Maretta. The case is on appeal from the Supreme Court of Virginia’s decision in Maretta v. Hillman, 283 Va. 34 (2012).

In deciding the case, the U.S. Supreme Court will settle a split between Federal Circuit Courts and some state supreme courts with other state supreme courts as to whether federal law precludes state law actions against the properly designated beneficiaries of federal life insurance policies.

Interestingly, the issues in Hillman v. Maretta were entirely avoidable. In fact, Mr. Hillman committed one of the most common, yet easily avoidable estate planning mistakes: The failure to update or coordinate life insurance and retirement beneficiaries with the intended estate plan. Mr. Hillman’s mistake is now before the Supreme Court.

Facts of the Case

In 1996 Warren Hillman designated his then-wife, Ms. Maretta, as the beneficiary of his federal group plan life insurance. Two years later Warren and Ms. Maretta divorced. Neither the divorce decree nor the associated property settlement agreement required Warren to maintain Ms. Maretta as his life insurance beneficiary. In 2002, Warren married Ms. Hillman. Despite his divorce and later marriage, Warren never changed his 1996 life insurance beneficiary designation.

In 2008, Warren died. Ms. Hillman, Warren’s widow, filed claims for life insurance benefits. However, consistent with the 1996 beneficiary designation, life insurance benefits were paid to Ms. Maretta.

In 2009, Ms. Hillman filed suit against Ms. Maretta, alleging that under Virgina Code Section 20-111.1(D) Ms. Maretta was liable to her in an amount equal to the amount that Ms. Maretta received from Warren’s federal life insurance. Ms. Maretta argued that federal law trumps state law and that whomever was officially designated as beneficiary of the life insurance policy, including an ex-spouse, is entitled to those benefits. As such, she cannot be held personally liable on the amount received by reason of receiving the benefits alone.

The Supreme Court of Virginia agreed with Ms. Maretta. The court held that federal law preempts Virginia Code Section 20-111.1(D)‘s state-law cause of action against an ex-spouse who is a designated beneficiary of federal group plan life insurance. According to the Supreme Court of Virginia, Section 20-111.1(D)’s grant of a cause of action against the life insurance beneficiary frustrates the federal purpose in providing benefits to those specifically designated by the insured, even if the beneficiary was an ex-spouse and the insured failed to change the designation.

Ms. Hillman appealed to the U.S. Supreme Court which will now hear the case sometime this spring.

Postscript

Unfortunately for Mr. Hillman, Section 20.111.1 did not contain its current language. In 2012, the law was changed requiring every divorce decree to have a conspicuous and bold message reminding policy holders to change beneficiary designations.

To avoid making the same mistake Mr. Hillman made, forgetting to change beneficiary designations, and other common estate planning mistakes, review this estate planning checklist and make sure that your plan is up to date and consistent with your wishes.

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