Thu. Jul 29th, 2021

Sometimes, state law and federal law disagree about what should happen in a particular circumstance. The Colorado Court of Appeals, in a decision handed down last month, found itself swimming in these waters. The facts of the case went like this.

Charles and Melissa Ragan married in 2012 and divorced in 2016. During the marriage, Charles took out life insurance policies through his employer, Federal Express, and named Melissa as the pay-on-death beneficiary. He did not change this designation after the divorce and, in 2017, he was killed in a car-bicycle accident. After Charles’ death, Melissa, since she was still the named beneficiary on the policies, applied to the administrator of the Federal Express benefits plan under which the policies had been issued and collected $535,000. Charles’ personal representative then filed a lawsuit against Melissa, seeking a ruling that Melissa had to return the money to Charles’ probate estate.

Now, to bring the law into play, Colorado has a statute that says beneficiary designations of any sort, including life insurance beneficiary designations, are canceled when a divorce decree enters. However, the federal Employee Retirement Income Security Act (ERISA), which was applicable here, says an administrator of an employee benefits plan must honor the beneficiary designations in place at the time a distribution is made, with no mention of divorce. And, ERISA goes on to say it preempts any state law to the contrary.

To further confuse things, the Colorado statute has an additional provision saying that, if an ex-spouse receives a distribution because federal law has preempted the basic termination-of-beneficiaries-on-divorce rule, the ex-spouse receiving the distribution can be sued and required to give back the money. It’s this latter provision that Charles’ personal representative relied on when suing Melissa. Although previous court decisions had made it clear ERISA’s preemption of the basic termination-on-divorce statute is effective, this can-be-sued-to-give-it-back part of the statute had never been tested. Thus, the question for the courts became: does ERISA also preempt this must-give-it-back add on to the basic statute?

The trial court and the Court of Appeals sided with Melissa on this issue and held that ERISA’s preemption of state law applies to both the basic termination-on-divorce part of the statute and the can-be-sued-to-give-it-back part of the statute. So, Melissa gets to keep the money. However, the Court of Appeals ruled the position taken by Charles’ personal representative in the litigation was not frivolous and refused Melissa’s request for an award of her attorneys fees.

The lesson from this case would seem to be clear. For parties going through a divorce, the issue of beneficiary designations needs to be specifically addressed and the Colorado statute saying beneficiary designations are canceled on divorce cannot be relied on, especially if the beneficiary designation was created as part of an employee benefits plan. If Charles had changed the beneficiary designation on his life insurance policies after the divorce and before his death, this lawsuit never would have happened and Charles’ estate would have received the $535,000, to be distributed in accordance with the terms of his will.

Jim Flynn is with the Colorado Springs firm of Flynn & Wright LLC. You can contact him at [email protected]