Destructive Federal Preemption of State Wealth Transfer Law in Beneficiary Designation Cases: Hillman Doubles Down on Egelhoff

The probate codes in about a third of the states contain a so-called divorce revocation provision, applicable both to probate and nonprobate transfers. Such statutes address the situation in which a transferor's will or will substitute designates as a beneficiary a person who was the transferor's spouse at the time that the transferor executed the document, but whom the transferor later divorced. The premise of these statutes is that divorce entails a profound change of circumstances not foreseen by the transferor, and that the transferor is unlikely to have intended to benefit an ex-spouse. Accordingly, the intent-implementing purpose of wealth transfer law is better served by having a default rule that treats the subsequent divorce as having revoked any provision for the now-ex-spouse unless the document expressly provides otherwise.In Egelhoff v. Egelhoff (2001), the Supreme Court held that when the instrument of transfer is a beneficiary designation in a pension plan or life insurance policy subject to federal regulation under the Employee Retirement Income Security Act ("ERISA"), the otherwise applicable state divorce revocation statute is preempted, even though ERISA makes no mention of divorce revocation. The Court reasoned that enforcing the state divorce revocation statute would "interfere with nationally uniform plan administration."Because the result in Egelhoff allowed supposed plan-level administrative convenience to defeat the principled objective of the divorce revocation statutes, a number of courts reacted by allowing so-called post-distribution relief, in some cases pursuant to a state statute so providing. Obeying Egelhoff, these courts preempted the state divorce revocation law at the plan level, thereby permitting the ex-spouse to receive the designated benefit from the plan, but allowing the person(s) entitled under the divorce revocation statute to recover those proceeds from the ex-spouse in a subsequent state-court action based on unjust enrichment. In a 2013 decision, Hillman v. Maretta, involving an insurance policy purchased under a program for federal employees, the Supreme Court extended preemption to forbid such post-distribution relief.In this Article, I point to serious shortcomings in the reasoning and policy merits of Egelhoff and Hillman. There is no federal policy favoring wealth transfer to ex-spouses. The divorce revocation statutes exemplify the core policy value of state wealth transfer law, which is to implement the transferor's intent, a policy distinct from and congruent with the purposes of the federal statutes on which the Court based preemption in the two cases. Unless Congress intervenes or unless the Court permits the development of a federal common law of divorce revocation, Egelhoff and Hillman will saddle American wealth transfer law with needlessly contradictory federal and state rules, sometimes applicable to different transfers by the same transferor.I. INTRODUCTIONIn a pair of decisions rendered a dozen years apart concerning beneficiary designations in financial accounts that pass wealth on death, Hillman v. Maretta (2013)1 and Egelhoff v. Egelhoff (2001),2 the U.S. Supreme Court has managed to get itself on the wrong side of two great social and demographic trends. One is the spread of divorce. Couples are no longer locked into failed marriages, and the divorce rate now exceeds forty percent.3 The other great trend is the transformation in the patterns of wealth transmission on death known as the nonprobate revolution,4 that is, the increasing tendency to transfer wealth by means of beneficiary designations in accounts administered by financial intermediaries such as life insurance companies, banks, investment companies, pension plans, and trust companies.5 These nonprobate modes of transfer have become so pervasive that, in the affairs of many (probably now most) decedents, more wealth passes by means of financial-account beneficiary designations than by will or intestacy in the traditional probate process. …