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A Constructive Trust May Be Used To Remedy ERISA Preemption

On Behalf of | Feb 25, 2014 | Divorce & Family, Wills, Trusts, Estate Planning and Administration

The Employee Retirement Income Security Act of 1974, commonly referred to as “ERISA” is a federal statute that governs many employer-based benefits such as pensions, IRAs, 401(k)s and other retirement benefits as well as employer-provided insurance benefits such as life insurance, health insurance, dental insurance, disability insurance, etc. Because ERISA is a federal statute, it preempts state law governing similar issues.

In a recent blog article, we reported on a federal court decision which upheld the ERISA presumption in spite of a divorce order which was contrary to the beneficiary designation. In the federal court decision, the court noted that the parties’ divorce agreement provided that the ex-wife did not have any interest in the ex-husband’s retirement accounts. Even the ex-husband was awarded the retirement accounts, he ex-husband never changed the beneficiary designation, which still provided that the ex-wife was the beneficiary of the accounts.. Upon the ex-husband’s death, his estate sued the employer’s plan administrator to get the retirement account benefits as the divorce agreement provided that the funds did not belong to the ex-wife, but instead to the ex-husband’s estate. The federal court sitting in New Hampshire denied the ex-husband’s estate’s claim, stating that the state court order was preempted by federal law and that the plan administrator was proper in paying the funds to the ex-wife, notwithstanding the ex-wife’s agreement in the state court case.

While it is advisable and recommended that beneficiary designations are changed upon divorce, in a recent decision from the New Hampshire Supreme Court may provide an avenue of protection in a situation where the beneficiary designations are not made prior to the death of an ex-spouse. In re the Estate of Lucien Couture, the New Hampshire Supreme Court upheld the imposition of a constructive trust against the beneficiary of an employer-based life insurance. The trial court found that the life insurance beneficiary had deceived the decedent into marrying her even though she was already married or living in a marriage-like relationship with another man and deceiving the decedent that he was the father of her child. The court further found that the life insurance beneficiary deceived the decedent into making her and her daughter the life insurance beneficiary of his employer-based policy.

Upon the decedent’s death, his estate sued the life insurance beneficiaries, not the employer or the employer’s plan administrator, and sought to impose a constructive trust due to the beneficiary’s deceit in obtaining the proceeds. The beneficiary sought to dismiss the claim, stating that federal law preempted state law from imposing a constructive trust. The New Hampshire Supreme Court upheld the imposition of the constructive trust, stating that ERISA does not prevent a state court from imposing constructive trusts against the person who receives the benefit from the plan administrator. The court noted that once the proceeds are distributed nothing under ERISA prevents a constructive trust being imposed upon the person who received the benefit to determine whether he or she is entitled to keep the benefit. The court noted that there is a fundamental difference between state law claims challenging a plan beneficiaries right to receive the benefit under an ERISA plan against claims that seek to challenge the plan beneficiary’s right to keep the proceeds for the plan.

Notwithstanding the potential remedy provide by the Couture court when a beneficiary designation is not changed consistent with a divorce agreement, it is strongly recommended that the beneficiaries are changed according to the terms of the divorce decree upon divorce because (1) there is no guarantee a trial court will impose a constructive trust in every circumstance; and (2) the cost of obtaining a constructive trust may be very expensive. A subsequent blog article will discuss the state law standard in applying a constructive trust.

If you have any questions regarding to what extent ERISA preempts the requirements of a divorce decree, please contact an attorney at Hamblett & Kerrigan.

 

Kevin P. Rauseo is a former director at Hamblett & Kerrigan P.A. and has since been appointed as a Justice for the New Hampshire Circuit Court.  Please feel free to contact another attorney at Hamblett & Kerrigan to discuss your legal issues.

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