Everyone should periodically review and update beneficiary designations on insurance policies, bank accounts, and retirement plans. But due to federal employee-benefit laws, divorced individuals need to be even more diligent about this, especially with respect to employer-sponsored plans. By being active in your estate planning, you can make sure that your hard work transfers to your intended beneficiaries according to your wishes.
ERISA, the Employee Retirement Income Security Act, controls most private-sector, employer-sponsored benefit and welfare plans. Retirement accounts and life-insurance policies are two types of plans that may be covered by ERISA. The law is so comprehensive that it supersedes any state law that relates to a covered benefit plan. 29 USC §1144. That brings us to the sticky subject of the day– Michigan divorces and how they interact with ERISA.
In Michigan, any insurance policy or account with a beneficiary designation is considered a “governing instrument.” MCL 700.1104(m), 2806(d). And when two people get divorced, any prior designation of the opposing spouse as a beneficiary is considered automatically revoked from the instrument. MCL 700.2807.
For example, if a bank account lists an ex-spouse as a transfer-on-death beneficiary, then instead of going to the ex-spouse, the bank account will transfer as part of the probate estate, meaning that the account holder’s Will would control who gets the money.
However, for plans covered by ERISA, benefits must be paid according to the designation in the plan document. 29 USC §1102(b)(4). This could trigger a conflict any time a divorced person fails to promptly update his or her beneficiaries. As you’ll see, this conflict may lead to absurd outcomes, all of which can be avoided with proper planning.
The Supreme Court confronted this exact issue in the case of Egelhoff v. Egelhoff, 532 U.S. 141 (2001). In that case, Mr. Egelhoff’s employer-sponsored life-insurance policy was paid out to his ex-wife, despite the fact that the designation was revoked by state law upon their divorce. Mr. Egelhoff had a Will, which devised his estate to his two children from a previous marriage. The children reasoned that they were entitled to the money since the ex-wife had been revoked as a beneficiary of the life insurance policy.
The Court held in favor of the ex-wife, however, because Mr. Egelhoff never removed her name from the policy. Remember, any conflict between state law and ERISA has to be reconciled in favor of ERISA. The payment under the life-insurance policy, therefore, had to conform with the plan language. Since Mr. Egelhoff never took his ex-wife’s name off of the policy, his children were not provided for the way he intended.
How to Avoid the Egelhoff Pitfall
As obvious as it seems, situations like the one above can be avoided simply by taking the time to periodically review and update one’s beneficiary designations. Any time someone encounters a life change–like marriage, divorce, a death in the family, or the birth of a child– it is good to pause and consider an estate-plan update, including a review of beneficiary designations.
If you need help planning for your family’s future, please contact me to discuss your options.
*Note that ERISA only applies to employer-sponsored welfare and benefit plans, so not all retirement plans or life-insurance policies are covered. This area of law can be confusing, so if you have any questions, please send me a message.