Life Insurance Proceeds are Not Always Treated the Same
A recent case illustrates the importance of the selection of life insurance to ensure that payments for the benefit of children and a spouse will occur.
In Stevens v. Stevens, Kimberly and Gene dissolved their marriage in 2015. Gene agreed to provide that their minor children be named as sole beneficiaries of his Servicemembers’ Group Life Insurance (“SGLI”) provided he had child support obligations.
After the divorce, Gene changed the beneficiary to his father and, upon father’s death, changed the beneficiary to his brother, Brian. Gene died in 2016 leaving his children as sole beneficiaries of his estate and Brian as the beneficiary of the life insurance.
Nathaniel J. Stevens adopted the children in 2018 and sued Brian and Kimberly, as personal representative of the Estate of Gene, for tortious interference with expectancy and numerous other claims and asked for a constructive trust of the life insurance proceeds payable to Brian to be held for the benefit of the children.
Brian stated that he was entitled to the proceeds of the SGLI under the Servicemembers’ Group Life Insurance Act (“SGLIA”) and any action to obtain those life insurance proceeds is preempted by federal law pursuant to the Supremacy Clause of the United States Constitution.
The SGLIA was enacted in 1965 and provides, in part, that SGLI proceeds are payable “[f]irst, to the beneficiary… as the member … may have designated by a writing received prior to death”. Such payments “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 (emphasis added).” “Congress has spoken with force and clarity indicating that the proceeds belong to the named beneficiary, and no other.“
At the trial court, Kimberly presented evidence that Gene intended that the children should receive the proceeds of the life insurance. She also stated that Brian had previously stated to Kimberly that Brian would manage the money for the children.
Of course, Brian had a different recollection of the conversations and stated that Gene wanted Brian to be the beneficiary. Gene did not want Kimberly to have any of the monies. Not surprisingly, Brian spent all the life insurance proceeds.
The lower court determined that, under the SGLIA, to be precluded from being paid to the named beneficiary, Brian, an extreme fact situation had to exist or Brian had to have obtained the life insurance proceeds through fraudulent or illegal means.
Kimberly argued and the lower court agreed with Kimberly that Brian was aware that Gene intended the money to be used for the benefit of his children. However, the court determined that there was no direct evidence that Gene and Brian had an oral contract, there was no inducement by Brian and Brian had no financial arrangement with Kimberly or the children. The court stated that the most that could be said was that Brian’s conduct was “morally indefensible”.
The lower court found that the evidence did not arise to an “extreme fact situation” or that the proceeds were obtained through “fraudulent or illegal means. Thus, the lower court entered a final judgement stating that the SGLIA prevented a judgement against Brian and federal preemption prevailed.
Nathaniel appealed and the appellate court affirmed and determined that the evidence neither indicated an “extreme fact situation” nor that the proceeds were obtained through “fraudulent or illegal means.”
ADVICE: For those that draft prenuptial or postnuptial agreements, clarify that, if the divorced spouse changes the name of the life insurance beneficiary, that the life insurance policy proceeds can be attached by the surviving spouse and/or children. Better yet…consider having the protected spouse the owner of the policy so the beneficiary designation can not be changed.
WORD OF THE WEEK: Federal preemption provides that, when state law and federal law conflict, federal law preempts state law under the Supremacy Clause of the Constitution. U.S. Const. art. VI., § 2. Preemption applies regardless of whether the conflicting laws come from legislatures, courts, administrative agencies, or constitutions.
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