Divorcees turn about in their graves as ex-spouses cash in: codified constructive trusts ensure an equitable result regarding Erisa-governed employee benefit plans.

• Author: Rayho, Sarabeth A.

A revocation-by-divorce statute essentially nullifies a devise in a divorced decedent's will when the devise bequeaths property to the decedent's ex-spouse and the will was executed during their marriage. Until recently, state revocation-by-divorce statutes unquestionably applied not only to wills but also to will substitutes, including ERISA-governed employee benefit plans. In 2001, the Supreme Court held in Egelhoff v. Egelhoff ex rel. Breiner that ERISA preempts traditional state revocation-by-divorce statutes as applied to ERISA-governed employee benefit plans. In the wake of the Egelhoff decision, plan administrators may automatically pay proceeds to the listed beneficiary, even an ex-spouse, regardless of the existence of a traditional state revocation-by-divorce statute. One solution to this preemption is the use of a constructive trust. Uniform Probate Code section 2-804(h)(2) imposes a constructive trust against an ex-spouse when the ex-spouse receives proceeds from an employee benefit plan because ERISA preempts a state revocation-by-divorce statute. The constructive trust is in favor of those persons who would take if the corresponding state revocation-by-divorce law were not preempted. This Note argues that state statutory constructive trusts adopting Uniform Probate Code section 2-804(h)(2) can resurrect the revocation-by-divorce doctrine as applied to ERISA-governed employee benefit plans. In doing so, constructive trusts would achieve an equitable result consistent with the law's treatment of other will substitutes as well as wills themselves. The Note begins by discussing the revocation-by-divorce doctrine and ERISA jurisprudence and explains how ERISA intertwines with traditional revocation-by-divorce statutes. The Note then reviews currently suggested methods to harmonize ERISA-governed employee benefit plans with the treatment of other will substitutes and contends that those proposals are inadequate because they undermine ERISA's goals. The Note concludes that state constructive trust statutes will avoid ERISA preemption while also furthering ERISA's goals.

TABLE OF CONTENTS INTRODUCTION I. TRADITIONAL REVOCATION-BY-DIVORCE STATUTES AND ERISA A. The Revocation-by-Divorce Doctrine: Protecting Divorced Decedents' Presumed Intent B. ERISA: Protecting Plan Participants' Interests II. CURRENTLY SUGGESTED METHODS DO NOT ADEQUATELY HARMONIZE ERISA-GOVERNED EMPLOYEE BENEFIT PLANS WITH THE TREATMENT OF OTHER WILL SUBSTITUTES A. Federal Common Law: Reincarnating State Law Thwarts ERISA's Goals B. Amendment of ERISA: Little Hope of Congressional Action C. Reform of the Plan Documents: Too Difficult to Facilitate National Change III. APPLYING STATUTORY CONSTRUCTIVE TRUSTS TO ERISA-GOVERNED EMPLOYEE BENEFIT PLANS ENSURES AN EQUITABLE RESULT A. The Constructive Trust Doctrine Seamlessly Applies to ERISA-Governed Employee Benefit Plans B. State Constructive Trust Statutes Are Not Preempted by ERISA C. Constructive Trusts are Superior to Other Suggested Solutions to the ERISA Preemption Problem CONCLUSION INTRODUCTION

When Harry met Sally, they fell in love and were married soon thereafter. Because he loved her, Harry. named Sally as the primary beneficiary under his will, his life insurance policy, and his employee pension plan. After several years, however, the love was lost: Harry and Sally divorced, based in part on Sally's extramarital affair with Russell. In the divorce proceedings, both Harry and Sally individually acquired their respective shares of marital property. Dividing the assets, the divorce court saw fit to award Harry his own life insurance policy and employee pension plan. Harry succumbed to heart failure shortly after the divorce, leaving several heirs at his death, including his brothers and sisters. As it was, Harry died before getting around to changing the beneficiary designations on his insurance policy and employee pension plan, so both still listed Sally as the primary beneficiary at the time of Harry's death. In the end, it appears Sally receives not only her fair share of property from the divorce but also some assets the divorce court saw fit to award Harry. Sally and her new husband, Russell, deposit Harry's assets in their joint bank account, and Harry's heirs walk away empty-handed.

Given the high divorce rate in the United States, (1) decedents frequently pass away leaving wills and other documents designating an ex-spouse as a beneficiary of property. (2) Married couples typically provide that their spouses are the primary beneficiaries in wills and other instruments covering personal property. When a couple obtains a divorce, it is in the interest of each divorcee to update his or her documents accordingly. Unfortunately, some divorcees neglect to change beneficiary designations before it is too late. These individuals pass away with wills and other instruments still listing their former spouses as beneficiaries. In these circumstances, courts have been forced to decide whether to enforce beneficiary designations.

Applying what is known as the revocation-by-divorce doctrine, courts have long held that when a divorced decedent's will was executed during his marriage and the will devises property to his ex-spouse, the devise is essentially nullified. (3) Unless the testator's actions after his divorce manifested a clear intent to devise property to his ex-spouse, the ex-spouse will not receive the devised property from the decedent's estate. (4) Wills, however, govern only the probate estate--"property owned by the decedent at death and property acquired by the decedent's estate at or after the decedent's death." (5) In addition to probate property, an increasing number of individuals distribute considerable nonprobate assets at death through the use of will substitutes (6) such as life insurance policies and employee pension plans governed by contract terms listing beneficiaries. (7) In 1990, recognizing the importance of will substitutes, section 2-804 of the Uniform Probate Code ("UPC") extended the revocation. by-divorce doctrine to cover both wills and will substitutes. (8)

Until recently, state revocation-by-divorce statutes like UPC section 2-804 unquestionably applied to all will substitutes. However, in 2001, the Supreme Court held in Egelhoff v. Egelhoff ex rel. Breiner that the Employee Retirement Income Security Act ("ERISA") preempts traditional state revocation-by-divorce statutes as applied to ERISA-governed employee benefit plans. (9) The Court's ruling created a rift between the treatment of employee benefit plan beneficiary designations and the treatment of beneficiary designations in wills and all other will substitutes. In the wake of the Egelhoff decision, plan administrators (10) may automatically pay proceeds to the listed beneficiary, even an ex-spouse, regardless of the existence of a traditional state revocation-by-divorce statute. Revocation-by-divorce statutes remain applicable to wills and will substitutes other than ERISA-governed employee benefit plans. (11) Given the policy rationale behind the revocation-by-divorce doctrine--that divorcees do not intend for ex-spouses to receive additional benefits at the divorcees' deaths, especially because any obligation to the ex-spouse was satisfied in the divorce proceeding--the Court's decision may enable unjust enrichment of the ex-spouse through receipt of proceeds from the decedent's employee benefit plans. (12)

Courts have used the longstanding constructive trust doctrine to prevent similar kinds of unjust enrichment. (13) The doctrine affords courts the opportunity to give effect to the law that applies to the circumstances before them "but use equity to ensure that the property goes where equity directs." (14) The Restatement (Third) of Trusts explains:

A constructive trust is a relationship with respect to property usually subjecting the person by whom the title is held to an equitable duty to convey the property to another on the ground that the title holder's acquisition or retention of the property is wrongful and that unjust enrichment would occur if the title holder were permitted to retain the property. (15) Traditionally, courts imposed constructive trusts in situations involving mistake, duress, undue influence, fraud, or breach of a confidential or fiduciary relationship. (16) Nonetheless, over time these requirements have coalesced into the general concept of "unjust enrichment." (17) Today "there are numerous situations in which a constructive trust is imposed in the absence of fraud, as for example in the case of ... an innocent donee of property in which another has an equitable interest." (18) Courts can use constructive trusts in a variety of situations, and judges have used the doctrine in the probate context. (19) In fact, "the most common use of constructive trust is to restore ownership of property in disputes within families." (20)

The constructive trust doctrine is historically a judicial remedy. (21) Nevertheless, the drafters of the current UPC codified the constructive trust doctrine to apply if its revocation-by-divorce provision were to be preempted by federal law. (22) Section 2-804(h)(2) of the UPC provides as follows:

If ... any part of this section [2-804] is preempted by federal law with respect to ... any ... benefit covered by this section, a former spouse ... who, not for value, received a payment.., to which that person is not entitled under this section is obligated to return that payment ... to the person who would have been entitled to it were this section or part of this section not preempted. (23) If an ex-spouse receives proceeds from an employee benefit plan because ERISA preempts a state revocation-by-divorce statute such as UPC section 2-804(b), section 2-804(h)(2) mandates that a constructive trust be imposed against the ex-spouse in favor of those persons who would take if the corresponding state law were not preempted. (24)...