Divorcing couples likely feel relief once they learn that the court has signed an order legally ending the marriage. However, just because the order is signed does not mean the divorce process is done – new deeds need to be recorded, mortgages assumed by one party or the other, credit cards paid off and closed, transferring title to vehicles, and changing beneficiary designations on retirement policies including life insurance. Serious complications occur when these post-divorce tasks are ignored. One complication occurs when an individual dies, but their ex-spouse is still listed as a beneficiary in a will, trust, life insurance policy, or retirement plan. In Minnesota, the legislature has provided a remedy for exes who neglect changing their beneficiaries. Minnesota Statute 524.2-804 provides that a dissolution of marriage order revokes a beneficiary designation of a former spouse. On its face, this statute seems to provide a “catch all” for exes who never got around to getting beneficiaries changed after a divorce. In many cases the statute does just that, but with one huge exception – employee benefit plans falling under the purview of The Employee Retirement Income Security Act of 1974 (ERISA).
ERISA is a federal law that sets standards for benefit plans in private industry to provide protection for employees enrolled in these plans. One ERISA standard directs the distribution of a benefit plan upon the death of an employee. ERISA’s standard is that whomever is designated as the employee’s beneficiary is the person entitled to distribution of the benefit plan – even if that beneficiary is the ex-spouse of the now deceased employee. This standard is the direct opposite of Minnesota statute. But because ERISA is federal statute, ERISA standards preempt any contrary state laws.
The U.S. Supreme Court in the case of Egelhoff v. Egelhoff, 532 U.S. 141 (2001) ruled that ERISA’s beneficiary designation standard preempts any state law providing for a different distribution and the ex-spouse listed as the beneficiary was entitled to receive the proceeds of an employer provided life insurance policy. Estate planning, probate, and family law practitioners alike would be wise to discuss ERISA preemption when encouraging clients to keep their beneficiary designations current.