It is clear that the nonparticipant spouse has a community property interest in the participant's qualified plan and IRA benefits, to the extent earned during marriage. It is also clear (in most states) that a spouse’s community property interest in the other spouse’s IRA may be transferred by will or intestacy. If ERISA applies, however, state law on this issue may be preempted.[1]
The Rules Governing the Division of The Community Property Interest of a Nonparticipant Spouse On Divorce Are Now Provided By ERISA and the IRC. Until 1986, there was controversy in most all of the community property states[2] regarding the division on divorce of pension benefits subject to ERISA. §204(b) of the 1984 Retirement Equity Act, P. L. 98-397 amended ERISA (by adding §206(d)(3)) and the Internal Revenue Code (by adding IRC §414(p)) to provide that pension benefits could be awarded in a domestic relations action, if otherwise awardable under state law, despite the federal preemption provision of ERISA §514(a), if certain procedures —spelled out clearly(?) in two and a half pages of fine print— are followed. Thus was born the QDRO, the qualified domestic relations order. State and federal courts will continue to stay busy for the foreseeable future, interpreting §414(p) and wrestling with the proper methodology for valuing pension benefits, but we are not going to concern ourselves overmuch with these issues here. Dividing pension benefits in divorce is now more of a question of applying the law than it is of figuring out what it is.
At the beginning of 1997, the last major unanswered question of law remaining in this area was whether state probate laws affecting a participant’s interest in a plan were preempted, assuming the plan was subject to ERISA. In this area there is no federal law similar to the QDRO procedures. Prior to the Supreme Court decision in Boggs, all we had to go by was the preemption section of ERISA, as variously interpreted by conflicting circuit courts.
The Boggs Case. In the late spring of
1997, the United States Supreme Court, in Boggs
v. Boggs,[3] gave us some
needed answers. Whether the answers given raise more questions than they solved
remains to be seen. After Boggs, we
know that if the nonparticipant spouse
dies first, the community property interest of the nonparticipant spouse is not
transferable to the spouse’s beneficiaries. Further, a state court cannot
rectify the situation indirectly by seeking an accounting or restitution or set
off of the participant’s other assets not in the plan. This much is clear.
Before discussing the Boggs decision in any length, a few brief remarks regarding the checkered history leading up to the decision are in order. These remarks will be kept very brief, because now that the Supreme Court has spoken, most of what went on in the past leading up to the decision is of academic interest only. However, a quick review of some of the cases preceding Boggs should be enlightening.
In California, rights in plan benefits are community property, subject to division on divorce; but traditionally it was held that the nonparticipant's rights disappear at death.[4] This principle has been dubbed the "terminable interest rule," not to be confused with the marital deduction rule having the same name.[5] Several California cases have indicated that the terminable interest doctrine no longer applies,[6] but the California Supreme Court has not directly so held.
California repealed the terminable interest rule by a 1986 amendment to §4800.8 of the California Civil Code (the California Family Law Act). It is clear that this legislative change applies on divorce; it is not clear that it applies at death although there is evidence in the legislative history to suggest that it should.
In Farver v. Department of Retirement Systems, 644 P.2d 1149 (1982), the Supreme Ct. of Washington state held that the terminable interest rule did not apply to a situation where a wife died after a divorce court had ordered a division of retirement benefits but before the benefits had been distributed. Therefore the interest set aside by the divorce court passed to the wife's heirs.
Valdez v. Ramirez, 574 S.W.2d 748 (Tex. 1978) was an important Texas case on the question of the nonparticipant spouse's community property rights in qualified plan proceeds; unfortunately, this case did not answer all of the issues. The case held that in the case of benefits payable under the Federal Civil Service Retirement Act, the adult children of a predeceased husband could not recover their father's community property portion of the wife's retirement benefits. In Allard v. Frech, 754 S.W.2d (Tex. 1988), the Texas Supreme Court, not without difficulty, refused to extend this principle to private retirement plans. First, the Valdez case:
"A settled marital property rule in Texas is that a spouse has a community property interest in that portion of the retirement benefits of the opposite spouse earned during their marriage.
* * * *
"It [the gravamen of the Valdez case] calls for a decision of whether the interest of a spouse who died prior to any division or divorce should pass to his heirs under Texas Prob. Code §45, or should be paid to the living and earning spouse in accordance with a joint and survivor option which she had exercised under the Federal Civil Service Retirement Act.
* * * *
"At the outset, it is recognized that under ordinary circumstances, where there is no contract or provision of law to the contrary, §45 of the Texas Prob. Code would govern the distribution of a deceased spouse's interest in the community property as the Court of Civil Appeals has ruled.
"On the other hand, however, there are at least four categories of assets known as nonprobate assets, not subject to disposition by will and not subject to the rules of intestate distribution. Examples are (1) property settled in an inter-vivos trust, where title remains in the trustee notwithstanding the settlor's death; (2) property passing by right of joint survivorship, as in a valid joint bank account; (3) property passing at death pursuant to terms of a contract, such as provided in life insurance policies, and under contributory retirement plans; and (4) property passing by insurance or annuity contracts, created, funded and distributed as directed by federal statutes. In the context of the Texas community property system, the disposition of such nonprobate assets is governed by lifetime transfer rules, not by death time transfer rules of the Probate Code. See Johanson, Revocable Trusts and Community Property: The Substantive Problems, 47 Texas L. Rev. 537 (1969).
"Lily Valdez's retirement benefits were provided for her by her contract of employment as a civil service employee of the United States Government. United States v. Price, 288 F. 2d 448, 450-51 (4th Cir. 1961)."[7] [Emphasis added.]
The Court concluded its analysis by holding that the adult children of the predeceased husband could not recover their father's community property portion of the wife's retirement benefits:
"The issue presented by this case is whether a husband's community interest in his surviving wife's civil service retirement benefits is inheritable upon his death by adult children of his former wife. We hold that it is not."[8]
One of the earliest cases recognizing that the nonparticipant spouse had a community property interest in the participant’s plan at death was a 1982 New York Federal District Court case, Employee Savings Plan of Mobil Oil Corp. v. Geer.[9] The case is interesting for a number of reasons, chief among which is the spouse’s legal theory as to why she was entitled to three-quarters of the community benefit rather than half. The decedent —in this case the participant— left half of his pension plan benefits to his wife, and the other half to the children. The wife (who can fairly be described as grasping) maintained that she was entitled (a) first of all to her one-half community property interest, and (b) secondly, to the one-half that would then pass by the husband’s beneficiary designation —“thank you so much”! Of course, under Texas community property law, since the husband died first, his interest would be a nonprobate asset, and in the absence of fraud, he had the power to dispose of the wife’s half. Further, even if he did not have this power, it would certainly be overreaching to leave the wife three-fourths of the benefit. The case did not dispose of the spurious state law claims, but did hold, in denying a motion for summary judgment, that ERISA did not preempt the matter. ERISA preemption in this context could still be an issue in the future, because here the participant predeceased the nonparticipant spouse, rather than the other way around as in Boggs. (It might be observed that the state interest in enforcing marital property laws is perhaps less pressing —to the extent it conflicts with ERISA— after the participant has died than it is during the participant’s retirement years.)
This case involved the testamentary rights of a participant in a plan to direct, by will, where his death benefits were to go. The court took for granted that state law conferred upon the decedent the power to do this, but found that Federal preemption prevented state law from controlling. Accordingly, the decedent's death benefits under the Ford Motor Company plan, passed in accordance with the terms of the plan, rather than in accordance with the state testamentary transfer act.
In Allard v. Frech, 735 S.W.2d 311 (Tex. App.-Fort Worth 1987, affm'd 754 S.W.2d 111 (Tex. 1988)), the Fort Worth Court of Appeals held that half of the husband's General Dynamics pension passed under the wife's will to a trust for the benefit of the couple's adult children. This decision was affirmed by the Texas Supreme Court.
Mr. Allard had retired under the General Dynamics plan. His benefit was in pay status at the time of his wife's death. He had elected to receive a life annuity with a ten year certain payout. In Valdez, the surviving participant wife had elected a joint and survivor annuity which would have inured to the benefit of the husband had he survived the wife. The Court of Appeals in Allard noted that the annuity in Valdez was a valid joint and survivorship community asset, and was therefore a non-probate asset (even though it was probably unilaterally elected).[10] Because an annuity distribution was not elected in Allard, Valdez was distinguished. This distinction was not, however, the basis of the affirmation by the Texas Supreme Court.
The Texas Supreme Court case basically held that the distinguishing feature in Allard was that Allard involved a private pension, whereas Valdez was governed by the Federal Civil Service Retirement Act:
"[Valdez] was primarily based on the preemption of Texas community property law by the requirements of the Federal Civil Service Act which provided for the payment of retirement benefits only to the employee, or in the case of the employee's death, to the surviving spouse and the employee's minor children, incapacitated or student children. We held that it would be contrary to the entire contract, policy, and plan of the Federal Retirement Act for nearly one-half of Mrs. Valdez's monthly payments to be taken from her and awarded to her deceased husband's adult children."[11]
It does not appear from a reading of the opinion that federal preemption under ERISA §514(a) was timely raised.
The next significant case to wrestle prominently with the issue arose in the Ninth Circuit, Ablamis v. Roper.[12] The 9th Circuit has squarely held that in a fact pattern virtually identical to Allard the California community property interest of the predeceasing nonparticipant spouse in the participant’s plan was not a probate asset because ERISA preempted state law. Finally —it was only a matter of time—, the Fifth Circuit was faced with the question.[13] The Fifth Circuit reached a conclusion contrary to the Ninth. This case was Boggs v. Boggs, a case that made its way eventually to the United States Supreme Court where the Fifth Circuit was reversed in 1997.
A Federal District Court confronting Louisiana community property laws reached the same conclusion as in Ablamis under almost identical facts: The interest of the nonparticipant did not pass to the decedent’s children because of federal preemption.[14] Further, the court held that the children could not avoid the consequences of preemption by having their claim satisfied out of other assets of equivalent value.
This case was originally decided by applying Louisiana law, since the decedent and his wives lived and (with the exception of wife two who is still living) died in Louisiana. The decedent, Isaac Boggs, was an employee of South Central Bell from 1949 until he retired in 1985. Isaac Boggs was married to Dorothy Boggs when he began employment until Dorothy’s death in 1979. Three children were born of this marriage. Dorothy’s will gave her husband a usufruct interest (similar to a life estate) in two-thirds of her estate, with the remainder to go to her three sons. Mr. Boggs married Sandra Boggs in 1980, and died in 1989. In 1985, Mr. Boggs received a distribution of a portion of his retirement plan benefits, which he rolled over to an IRA. The opinion does not indicate whether this portion of the plan was subject to the joint and survivor annuity rules. If it was, then Sandra must have waived her rights, or the proceeds could not have been rolled over into an IRA. Of course, the IRA, presumably, would not have been subject to ERISA or