Remind Divorced Employees to Update Beneficiary Designations

Employers: think about reminding your employees to update their beneficiary designations and forms after divorce.

For multiple covered assets, section 732.703, Florida Statutes voids upon divorce beneficiary designations of an ex-spouse. See State Farm Life Insurance Company v. Stone, Case No. 5:15-cv-267-Oc-30PRL (MD Fla. October 9, 2015). In Stone, the court allowed interpleader of disputed proceeds of former husband’s life insurance policy until former wife’s conflicting claims with a successor beneficiary could be resolved.

Similar automatic revocation on divorce applies to will and trust provisions designating an ex-spouse as beneficiary. Effective July 1, 2021, Florida’s Probate Code, Section 732.507(2), Florida Statutes (wills) and Section 736.1105, Florida Statutes (revocable trusts), void on divorce provisions that “affect” an ex-spouse. See Laws of Florida 2021-183.

Will and Revocable Trust Provisions that “Affect” a Former Spouse: Update Beneficiary Designations

Will Provisions that Affect An Ex-Spouse Are Void on Divorce

With few exceptions, Florida law voids upon entry of a final judgment of dissolution, any will provision that “affects” a former spouse.  Divorcing employees should review their estate planning documents and update beneficiary designations under their will.

Section 732.507(2), Florida Statutes, amended effective July 1, 2021 (Laws of Florida 2021-183), provides:

(2) Any provision of a will that affects the testator’s spouse is void upon dissolution of marriage of the testator and the spouse, whether the marriage occurred before or after the execution of such will.  Upon dissolution of marriage, the will shall be construed as if the spouse died at the time of the dissolution of marriage. 

Revocable Trust Provisions that “Affect” an Ex-Spouse Are Void on Divorce: Update Beneficiary Designations.

The same result applies to provisions of revocable trusts that “affect” a settlor’s ex-spouse. Unless an exception to automatic revocation applies, Florida law voids revocable trust provisions that “affect” a former spouse. Therefore, when reviewing estate planning, divorcing employees should update beneficiary designations under revocable trusts.

Section 736.1105(2), Florida Statutes, amended effective July 1, 2021 (Laws of Florida 2021-183), provides:

(2) Any provision of a revocable trust that affects the settlor’s spouse is void upon dissolution of marriage of the settlor and the spouse, whether the marriage occurred before or after the execution of such revocable trust.  Upon dissolution of marriage, the revocable trust shall be construed as if the spouse died at the time of the dissolution of marriage. 

Courts Broadly Interpret What “Affects” an Ex-Spouse

But what does “affect” an ex-spouse mean? Courts interpret “affects” broadly.  See what the court did in Carroll v. Israelson, 169 So. 3d 239 (Fla. 4th DCA 2015) (followed in Galazka v. Estate of Perkins, 184 So. 3d 635 (Fla. 4th DCA 2016)).

For provisions to “affect” an ex-spouse, they don’t need to benefit the former spouse directly. For example, in Carroll v. Israelson, the court held the statute invalidated will provisions establishing trusts for the decedent’s ex-wife’s relatives. Because such provisions “affected” her, they were invalid upon divorce. Read more here.

When Employees Don’t Update Beneficiary Designation Forms after Divorce

Assets covered under Section 732.703, Florida Statutes will pass as if the decedent’s ex died when they divorced. This statute may affect certain employee benefits.

An employer learns about the Florida employee’s divorce. The employer may consider notifying the employee about updating beneficiary designation forms after divorce.

How it Plays Out: Life Insurance Beneficiary Designations (Section 732.703)

A former husband names his ex-wife as primary beneficiary on the beneficiary designation form for his life insurance policy. She claims benefits under the policy. But, following their divorce, he never updates his beneficiary designation form.

Relying on Section 732.703, Florida Statutes, the life insurance company may review the insured’s marital status on the death certificate and may pay out the proceeds. The company may make these payment decisions and avoid the delay and expense of an interpleader action.

Example Scenarios

First Example: Single, Divorced, or Married to Someone Else.

The death certificate states the decedent was unmarried at death. It lists the marital status as “Single” or “Divorced” or “Married” (to someone other than the former spouse). Unless a statutory exceptions applies, Section 732.703(5) authorizes a payor to pay the secondary beneficiary. 

Second Example: Insured Decedent Was Married to the Named Beneficiary 

The death certificate states the decedent was married to the spouse named as the primary beneficiary. The payor/insurer won’t be liable for paying on account of, or transferring an interest in, the asset to the primary beneficiary.

Third Example: Beneficiary Designation Form Doesn’t State the Relationship With the Beneficiary

Now, suppose the governing instrument names a beneficiary, but doesn’t specify the relationship between the decedent and named beneficiary. Or, the instrument explicitly provides the beneficiary is not the decedent’s spouse. The payor/insurer won’t be liable for paying on account of, or transferring an interest in, the asset to the named beneficiary.

Fourth Example: Silence About Marital Status

What if the death certificate is silent about the decedent’s marital status at the time of death? The payor is not liable for paying on account of, or for transferring an interest in, the asset to the primary beneficiary. The primary beneficiary must deliver to the payor an affidavit in substantially in the form set forth in Section 732.703(5)(b), Florida Statutes.

Divorcing employees should update their beneficiary designations in policies, trusts, and wills that “affect” their ex.  If they fail to do so, death benefits may go to someone whom the employee didn’t intend.

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Section 732.703, Florida Statutes: Automatic Revocation of Beneficiary Designations on Divorce

Section 732.703(2), Florida Statutes applies to decedents who die after July 1, 2012, regardless of when they made a beneficiary designation.

The statute applies to the following assets in which a Florida resident has an interest at death:

(a) A life insurance policy, qualified annuity, or other similar tax-deferred contract held within an employee benefit plan.

(b) An employee benefit plan.

(c) An individual retirement account, including an individual retirement annuity described in section 408(b) of the Internal Revenue Code of 1986.

(d) A payable-on-death account.

(e) A security or other account registered in a transfer-on-death form.

(f) A life insurance policy, annuity, or other similar contract that is not held within an employee benefit plan or a tax-qualified retirement account.

Exceptions Under Section 732.703 to Automatic Revocation of Beneficiary Designations 

There are exceptions to automatic revocation under Section 732.703, Florida Statutes of beneficiary designations.

Exception 1: Controlling Federal Law Provides Otherwise

Federal law preempted state automatic revocation statute

Federal law may preempt automatic revocation. For example, in Hillman v. Maretta, 133 S. Ct. 1943 (2013), the U.S. Supreme Court held federal law, the Federal Employees’ Group Life Insurance Act of 1954 (FEGLIA), preempted a Virginia statute similar to Florida’s automatically revoking a beneficiary designation on a federal employees’ life insurance policy. The decedent, a federal employee, remarried. But he never changed the designation of his ex-wife as beneficiary. His widow lost her lawsuit seeking to direct the payment of the death benefit to his estate, of which she was beneficiary, rather than to his former wife.

Citing Hillman, a Florida state court held, if the Servicemembers’ Group Life Insurance Act (SGLIA) protected a beneficiary designation under a life insurance policy under the SGLIA, federal law would preempt the state court’s order. The order  directed a former husband to change the beneficiary designation of his life insurance policy. Hirsch v. Hirsch, 136 So. 3d 622 (Fla. 2d DCA 2013).

2022 Preemption of State Law Claims (SGLI) – No Extreme Fact or Fraud Exception: Stevens

Consider, now, how federal law preempted state law tort and contract claims against an ex-husband’s successor designated beneficiary, his brother. Stevens v. Stevens, 340 So, 3d 536 (Fla. 1st DCA 2022).

Mom and dad divorced. A consent final judgment of dissolution of marriage directed him to keep life insurance to secure child support for their two kids. He had a Servicemembers’ Group Life Insurance (SGLI) policy for $400,000 designating his kids as beneficiaries.

She remarried. He changed the beneficiary designation from the kids to his dad and, upon his dad’s death, to his brother, Brian.

The former husband died, leaving the kids as sole beneficiaries of his estate. Mom’s new husband adopted them, then sued the brother (Brian) and mom in her capacity as personal representative of her ex-husband’s estate.

State Law Tort and Contract Claims Against Successor Beneficiary

The new husband sued the ex-husband’s brother for tortious interference with expectancy, conspiracy to commit conversion, constructive trust, accounting, and breach of third-party beneficiary contract. He sought a court order imposing a constructive trust on the assets traceable to the successor beneficiary’s (the brother, Brian) use of the life insurance proceeds.

Brian defended. He alleged he was entitled to the SGLI life insurance proceeds. He argued the Servicemembers’ Group Life Insurance Act (SGLIA) and the Supremacy Clause of the United States Constitution preempted the state law claims against him.

Testimony showed he spent the money on himself, rather than managing the funds for his brother’s kids. He used the money to pay off his mortgage and bills, purchase vacant lots and a life insurance annuity, and make donations. But not a nickel for his brother’s children.

SGLIA Allows Insured Servicemember Absolute Right to Designate Policy Beneficiary

Under the SGLIA, the insured has the absolute right to designate the policy beneficiary and change the designation at any time.  “Congress has spoken with force and clarity in directing that the proceeds belong to the named beneficiary and no other.” Ridgway v. Ridgway, 454 U.S. 46, 59 (1981).

SGLI proceeds shall be paid, first, “to the beneficiary or beneficiaries as the member or former member may have designated by a writing received prior to death.”  Payments due under an SGLI policy “shall not be liable to attachment, levy, or seizure by or under any legal or equitable process whatever, either before or after receipt by the beneficiary.” 38 U.S.C. § 1970(a), (g).

No Exception to Preemption for Extreme Fact Situation or Fraud

The trial judge found the evidence didn’t establish an exception to preemption of the SGLIA for an “extreme fact situation,” fraud or illegal means. The United States Supreme Court alluded to such an exception to premption in Ridgway v. Ridgway, 454 U.S. 46 (1981).  

The trial court based its finding on competent substantial evidence the brother didn’t know about the consent final judgment of dissolution of marriage when the former husband changed the beneficiary designation.  Evidence established no oral contract between the brother and  former husband to use the insurance proceeds for the children’s benefit.

Divorce and Beneficiary Designations: 2021 Preemption Case (ERISA)

Preemption came up in Ragan v. Ragan, 494 P. 3d 664, 2021 COA 75, Case No. 20CA0038 (Colorado Court of Appeals May 27, 2021). Deciding a matter of first impression, the Colorado Court of Appeals held the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001 to 1461, preempts post-distribution lawsuits against an ex-spouse under Colorado’s divorce-revocation statute, section 15-11-804, C.R.S. 2020.

As in Florida, Colorado law automatically revokes upon divorce any beneficiary designation of a former spouse. To avoid this result, the named ex-spouse must expressly waive rights to the ERISA plan proceeds.

The Ragan decision was consistent with Egelhoff v. Egelhoff, 532 U.S. 141 (2001). The US Supreme Court found ERISA preempted a state statute for automatic revocation upon divorce of a designated spouse as beneficiary.

But later cases limited preemption by holding it didn’t extend to state law contract claims to recover benefits after the plan administrator paid them to the named beneficiary. In re Estate of Easterday, 209 A. 3d 331 (Pa. Supreme Court 2019).

No Federal Preemption of Post-Distribution Claims When Ex-Spouse Expressly Waives Rights

On the other hand, when a spouse expressly waives rights to death benefits on an ex-spouse’s death, federal law hasn’t preempted state law claims by the ex-spouse’s estate or secondary beneficiaries. That’s what the Florida Third District Court of Appeal found happened in Martinez-Olson v. Estate of Olson, 328 So. 3d 14 (Fla. 3d DCA 2021).

In a marital settlement agreement, Mrs. Martinez-Olson specifically waived any entitlement to her TV producer decedent ex-husband’s 401(k). After they divorced, she still appeared as named primary beneficiary on the 401(k).  His employer, Sunbeam Television Corporation distributed the ERISA-governed 401(k) proceeds to her.

Plan Administrator Must Pay ERISA Benefits According to Plan Documents

In Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 555 U.S. 285 (2009), the United States Supreme Court held  29 U.S.C. § 1104(a)(1)(D) requires an ERISA plan administrator to act “in accordance with the documents and instruments governing the plan . . . and ERISA provides no exemption from this duty when it comes time to pay benefits.”

Plan Administrator: Follow the Plan Documents

The Eighth Circuit Court of Appeals applied the Kennedy “plan documents rule” in Gelschus v. Hogan, 47 F. 4th 679 (8th Cir. 2022). There, the court upheld Honeywell’s decision to follow its plan documents. It properly exercised discretion when it paid out an ex-wife’s 401(k) benefits to her surviving ex-husband. After their divorce and marital settlement agreement, in which he waived all claims to the 401(k), she filled out a defective change-of-beneficiary designation.

Back to Florida and Olson. The Florida 3d DCA in Olson concluded Mr. Olson’s estate could pursue a post-distribution action against the ex-wife to enforce the marital settlement agreement and recover the proceeds.

The settlement agreement was specific enough to override the beneficiary designation form.  It specifically referred to and the ex-wife waived any interest in the disputed 401(k) plan and the “proceeds therefrom.”

No Preclusion of Enforcement Claims After ERISA Benefits Are Distributed to Ex-Spouse Who Waives Interests

Compare the Olson marital settlement agreement with the Florida Supreme Court’s guidance in Crawford v. Barker, 64 So. 3d 1246 (Fla. 2011), which stated:

“General language in a marital settlement agreement, such as language stating who is to receive ownership, is not specific enough to override the plain language of the beneficiary designation in the separate document. The spouse, who owns the policy, plan, or account following the dissolution of marriage, is otherwise free to name any individual as the beneficiary; however, if the spouse does not change the beneficiary, the beneficiary designation in the separate document controls.” 

It’s unnecessary for divorcing parties to use magic words “death benefits” in expressing the waiver of interest in a specified 401(k) and its proceeds.

Therefore, applying these principles, the Olson court answered yes to the question of first impression: Could the estate bring the state law claim against the ex-wife as the named beneficiary to enforce a contractual waiver after distribution of the ERISA-governed 401(k) proceeds?

In support of its ruling, the Olson court cited the Eleventh Circuit decision in MetLife Life and Annuity Company of Connecticut v. Akpele, 886 F. 3d 998 (11th Cir. 2018). There, the court held, while a party not a named beneficiary can’t sue the plan for plan benefits, because ERISA preempts such claims, the party can sue the beneficiary to recover benefits received.

Waiver Enforced to Recover Proceeds Paid Out

Likewise, in Walsh v. Montes, 388 P. 3d 262 (NM Ct. App. November 14, 2016) the preemption doctrine did not bar claims between contestants to proceeds of a qualified Fidelity savings and investment plan under ERISA. As in Olson, the decedent designated her ex-husband on, but never updated, a beneficiary designation form.

The plan administrator properly paid out the proceeds of the account in reliance on the form and by the plan’s written terms. The court found that the ex-husband had waived his rights in a marital settlement agreement to benefits in the ERISA plan, however. Thus, the court allowed his ex-wife’s estate and children to pursue recovery against him for the proceeds he received. 

Similarly, in Gelschus v. Hogan, a personal representative’s breach of contract claim or, in the alternative, unjust enrichment claim could move forward against a former husband to recoup 401(k) benefits Honeywell paid out to him. He’d waived all rights to the 401(k) in the decent ex-wife’s and his marital settlement agreement.

The 8th Circuit’s ruling in Gelschus v. Hogan was consistent with law in other federal circuits. See Est. of Kensinger v. URL Pharma, Inc., 674 F. 3d 131 (3d Cir. 2012); Andochick v. Byrd, 709 F. 3d 296  (4th Cir. 2013); Metlife Life & Annuity Co. of Connecticut v. Akpele, 886 F. 3d 998 (11th Cir. 2018); Moore v. Moore, 297 So. 3d 359 (Ala. 2019).

Exception 2: After Divorce, the Employee Designates the Ex-Spouse as Beneficiary

After divorce, an employee may redesignate a former spouse as beneficiary on an updated beneficiary designation form. The spouse does that by signing a governing instrument expressly providing the benefit will be payable to the ex.

A divorcing employee may contractually commit to continue beneficiary designations after divorce for an ex-spouse’s or child’s benefit. Indeed, in the Florida Supreme Court’s approved family law form marital settlement agreements, there is a section that guides divorcing couples through options to make or keep beneficiary designations. Spouses may choose and state in the form if beneficiary designations are to continue after divorce. See In re Amendments to the Florida Supreme Court Approved Family Law Forms, 138 So. 3d 389 No. SC13-532 (May 1, 2014) and Florida Supreme Court Approved Family Law Form 12.902(f)(1), Marital Settlement Agreement for Dissolution of Marriage with Dependent or Minor Child(ren) (02/18).

Exception 3: Specific Post-Divorce Designations of Ex-Spouse to Receive Assets Under a Will or Trust

Assets Passing Under a Will

If a will or trust covers the asset, an employee may specifically designate an ex-spouse as beneficiary of the asset upon death. Effective July 1, 2021,  section 732.507(2)(b), Florida Statutes permits a specific post-divorce designation of a former spouse in a will to designate an ex-spouse as irrevocable beneficiary of an asset.

Assets Passing Under a Revocable Trust

Similarly, to maintain a trust asset for an employee’s ex-spouse’s benefit, effective July 1, 2021, section 736.1105, Florida Statutes doesn’t void statements in a revocable trust that refer to and specifically override automatic revocation. Nor does the amended statute void provisions of a revocable trust signed after divorce committing the employee to designate an ex-spouse as beneficiary.

Exception 4: Final Judgment of Dissolution or Marriage Provides Employee Keep Ex-Spouse as Designated Beneficiary

When a final judgment of dissolution requires the decedent to make or keep children of the marriage or a former spouse an irrevocable beneficiary of an asset, automatic revocation doesn’t apply.  A court may compel one spouse to maintain the asset for the benefit of a former spouse or children of the marriage. Examples are death benefits earmarked to secure alimony or child support if the employee dies before the employee’s support obligations end.

Exception 5: The Employee Has No Ability Unilaterally To Change the Beneficiary or Pay-On-Death Designation

No automatic revocation applies when the decedent couldn’t unilaterally change the beneficiary or pay-on-death designation for an asset.

Exception 6: The Law Makes the Employee’s Beneficiary Designation Irrevocable

When a decedent can’t revoke a designation of the former spouse as a beneficiary under applicable law, the automatic revocation statute doesn’t apply.

Exception 7: Law of Another State Applies to the Employee’s Beneficiary Designation

The automatic revocation of designations under Section 732.703, Florida Statutes, doesn’t apply when laws of a state other than Florida govern the instrument.

Exception 8: Co-Ownership

Two or more co-owners hold ownership of an asset.  One co-owner’s death vests ownership in the surviving co-owner or co-owners. The automatic revocation statute doesn’t change that result.

Exception 9: Ex-Spouses Remarry Each Other

The decedent remarries the ex-spouse whose interest would have been revoked. They’re still married to one another when the employee dies. Automatic revocation under Section 732.703 doesn’t apply.

Exception 10: State-Administered Retirement Plans

The automatic revocation statute doesn’t apply to state-administered retirement plans under Chapter 121, Florida Statutes.

Checklist for Employers

• Has the employee or plan participant notified the employer of a dissolution or annulment of marriage?
• Is the employee participating in a benefit plan within the scope of section 732.703?
• Does the employer consistently notify all employees of the importance of updating designations for life changing events such as divorce or annulment?
• Has the employer who receives notice of a divorce judgment notified the employee of the importance of updating designations?

An employee’s failure to update beneficiary designations in policies, trusts, and wills that “affect” an ex-spouse may cause death benefits to go to someone the employee didn’t intend.