Alvin J. Golden, Ikard & Golden, P.C., Austin, Texas
Copyright 1997 by Alvin J. Golden
Finally, an answer! Of sorts! While Boggs v. Boggs, ___ U.S. ___ (1997), clearly states that ERISA pre-empts state community property law as to undistributed benefits, it raises several new questions. In answering the pre-emption issue, the 5-4 majority openly stated that the issue to be resolved was not a technical construction of the "relate to" language of the statute. Rather, the majority emphasized what I perceive to be the overarching purpose of ERISA -- that it is a statute designed to provide primarily for the retirement of the participant and the participant's spouse and that the federal statute has pre-empted state property law and occupies the entire field.(2) Allowing state community property law to permit the non-participant spouse to dispose of one-half of the plan assets deprives the participant of the use of those assets for his or her retirement. While it may also result in allowing the participant to determine the devolution of all the plan benefits, that is a price that Congress decided was necessary to carry out the purpose of the statute. In the balancing of the equities, it seems to me that this is the proper balance. As noted in more detail below, the dissent spends a lot of time analyzing and applying the "relate to" test, which, as prior cases have demonstrated, can be applied to reach whatever result is desired. The dissent also seems to believe that Dorothy Boggs (the first wife) has somehow been deprived of her share of the plan benefits. It is important to keep in mind in analyzing Boggs that while the sons waited until after their father was dead to file their action, they could have demanded an accounting during his life while he was receiving benefits from the retirement plan.
The relevant facts in Boggs are somewhat complex. Isaac Boggs, a Louisiana resident, was married to Dorothy Boggs and he worked for Southern Bell Telephone for 36 years of their marriage. Dorothy died in 1979, and her will left one-third of her estate to Isaac and gave him a usufruct interest in the other 2/3, in which 2/3 their three sons had the "naked ownership."(3) At the time of Dorothy's death, Isaac had an interest in three types of retirement benefits -- a joint and survivor retirement annuity, an ESOP, and a profit sharing plan. Dorothy's interest in these plans was valued at approximately $22,000 in her "succession" (an "inventory" in the rest of the United States). In 1980, Isaac married Sandra. He retired in 1985. At that time he began drawing his retirement annuity, took the shares of the ESOP and rolled the profit sharing plan into an IRA. Isaac died in 1989, having made no withdrawals from the IRA.(4)
Two of the sons then filed an action for an accounting in state court requesting a judgment awarding them an interest in "the IRA; the ESOP shares of AT&T stock; the monthly annuity payments received by Isaac during his retirement; and Sandra's survivor annuity payments both received and payable." ____ U.S. at ___ (1997) (slip op. at 3). Sandra filed an action to the federal court seeking a declaration that ERISA pre-empted community property laws. She lost in both the District Court and the Fifth Circuit.(5) The Supreme Court granted certiorari because of the conflict between the Fifth Circuit in Boggs and the Ninth Circuit in Ablamis v. Roper, 937 F.2d 1450 (1991).(6)
The Court noted first that the case was important in that it affected 80 million residents of community property states with over $1 trillion dollars in qualified plan benefits. It also noted that it had already taken two other cases involving federal pre-emption during this term. After announcing that its decision would also affect claims in non-community property jurisdiction, the Court stated its very broad pre-emption test, which apparently adopts a new standard for applying pre-emption in ERISA related cases:
|ERISA's express pre-emption clause states that the Act "shall supersede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan...." §1144(a). We can begin, and in this case end, the analysis by simply asking if state law conflicts with the provisions of ERISA or operates to frustrate its objects. We hold that there is a conflict, which suffices to resolve the case. We need not inquire whether the statutory phrase "relate to" provides further and additional support for the pre-emption claim. (emphasis added.)|
Id., at ___ (slip op. at 7).
This test would appear to be a departure from the prior two part test which the Court adopted in several cases and in fact reiterated in another case decided this term, California Division of Labor Standards Enforcement v. Dillingham Construction, 519 U.S. ___ (1996).
|Our efforts at applying the provision have yielded a two-part inquiry: A law relate[s] to a covered employee benefit plan for purposes of §514(a) if it  has a connection with or  reference to such a plan. (Internal quotes and citations omitted.)|
Id. at ___ (slip op. at 7.)
In Dillingham, Justice Scalia wrote a concurring opinion in which he presaged the test enunciated by the majority in Boggs.
|[A]pplying the "relate
to" provision according to its terms was a project
doomed to failure, since, as many a curbstone philosopher
has observed, everything is related to everything else.
[Citation omitted.] The statutory text provides an
illusory test, unless the Court is willing to decree a
degree of pre-emption that no sensible person could have
intended -- which it is not.
[T]he "relate to" clause of the pre-emption provision is meant, not to set forth a test for pre-emption, but rather to identify the field in which ordinary field pre-emption applies -- namely, the field of laws regulating "employee benefit plan[s] described in section 1003(a) of this title and not exempt under section 1003(b) of this title." 29 U.S.C. §1144(a)....I think it accurately describes our current ERISA jurisprudence to say we apply ordinary field pre-emption, and, of course, ordinary conflict pre-emption....Nothing more mysterious than that; and except as establishing that, "relates to" is irrelevant. (emphasis in original.)
519 U.S. ___ (1996) (concurring slip op. at 3).
Thus, it would appear that the majority in Boggs is holding that it is necessary for community property laws to yield to ERISA where the effect of community property laws is to affect a field which Congress has appropriated for a federal purpose to carry out a uniform federal scheme.
In deciding whether Congress has pre-empted the field, the Court examined several provisions of ERISA, and determined that the purpose of the statute is to protect the interests of participants and beneficiaries; e.g., ERISA §§ 1001(c), 1104(a)(1), 1103(c)(1), and 1108(a)(2). Further, the Court examines QDROs and the QPSA and QJSA provisions in analyzing the rights that REA gave to a nonparticipant spouse.
|The surviving spouse annuity and QDRO provisions, which acknowledge and protect specific pension plan community property interests, give rise to the strong implication that other community property claims are not consistent with the statutory scheme. ERISA's silence with respect to the right of a non-participant spouse to control pension plan benefits by testamentary transfer provides powerful support for the conclusion that the right does not exist.|
Id., at ___ (slip op. at 14-15).
The Court then goes on to find that the sons are neither participants nor beneficiaries and rejects the argument that pre-REA case law in divorce indicates that ERISA did not pre-empt community property interests.(7) Additionally, the anti-alienation provisions of ERISA §1056(d)(1) give "specific and powerful reinforcement" to the pre-emption argument. Dorothy's attempted testamentary transfer is the prohibited assignment or alienation. Citing Treas. Regs. §1.401(a)-13(c)(1)(ii) which defines an assignment or alienation as including an interest acquired from a beneficiary or participant and "enforceable against the plan in, or to, all or any part of a plan benefit payment which is, or may become, payable to the participant or beneficiary." (emphasis added.)
|Under Louisiana Law community property interests are enforceable against a plan (Citation omitted.) If respondents' claims were allowed to succeed they would have acquired, as of 1980, an interest in Isaac's pension plan at the expense of plan participants and beneficiaries.|
Id., at ___ (slip op. at 19).
Thus, if Dorothy is a participant, by virtue of her community property interest, then the mere fact that the respondents' right might be enforceable against payments to be received violates the anti-alienation provision. I am not sure that the logic is especially sound, since there is still the question as to whether Dorothy's beneficiaries could enforce the rights against the plan. (But should they not have that right if Dorothy was a participant by virtue of the community property law?)
The Court returns to its premise that ERISA is designed to protect beneficiaries and participants. Respondents would cause a diversion of substantial benefits to testamentary recipients. "Retirement benefits and the income stream provided for by ERISA-regulated plans would be disrupted in the name of protecting a nonparticipant spouse's successors over plan participants and beneficiaries." Id., at __ (slip op. at 20).
The Court then goes on to reach what ought to be an obvious response to respondents' argument that the suit is simply one for an accounting, and in no way affects the plan. Free v. Bland, 369 U.S. 663 (1966), involved Texas community property law. In that case, federal regulations required that U.S. Savings Bonds, which were community property, passed to the surviving spouse as co-owner. Texas community property law, at that time, did not recognize joint tenancy in community property. Conceding that federal law pre-empted, the state court required that the deceased wife's heirs had to be reimbursed for the loss of community interest in the bonds. The Supreme Court, finding that the wife's beneficiary should not be able to affect property interests indirectly that he could not affect directly, stated, "Viewed realistically, the State has rendered the award of title [under federal law] meaningless." Id., at 669.
The Boggs Court then went on to note that whether the interest of Dorothy's beneficiaries is enforced against the plan or against the recipient of the benefits, the result is the same.(8)Returning to an earlier theme as to the purpose of ERISA, the Court notes that "ERISA is for the living." In summary, the Court says:
|It does not matter that respondents have sought to enforce their rights only after the retirement benefits have been distributed since their asserted rights are based on the theory that they had an interest in the undistributed plan benefits. Their state-law claims are pre-empted.|
___ U.S. at ___ (slip op. at 22).
As pointed out above, the dissent seems to perceive this case as one in which Sandra, a second wife of ten years, is taking something away from Dorothy, the first wife of thirty-six years. The dissent notes that Sandra is asking "the court to say that the shares of stock, the cash, and the annuity payments were entirely hers." ___ U.S. at ___ (dissent slip op. 4). However, the facts are that Sandra received only a usufruct, with the three children receiving the naked ownership and that the suit by the respondents also asked for an accounting of the benefits received by Isaac during his life. Id., at ___ (slip op. at 3).
The dissent emphasizes strongly that this is not a lawsuit against a fund and speculates that the law of Louisiana would not allow such a suit and that this suit does not change the basic duties of a plan fiduciary. While citing Ingersoll-Rand Co. v. McClendon, 498 U.S. 133 (1990), the dissent misses the application of this case to the issue in Boggs. That case involved a suit for wrongful discharge. The plaintiff alleged that he was discharged to prevent his pension benefits from vesting,(9) and the Supreme Court of Texas found that this action was not pre-empted by ERISA since the suit was a tort action against the company and was not a suit against the plan. The United States Supreme Court found that ERISA provided a remedy for wrongful discharge to prevent benefits from vesting and that without the existence of the plan, there would be no cause of action and that the wrongful discharge "related to" the plan. (See Appendix 1 for a more complete discussion of Ingersoll-Rand.)
The dissent continues, "The lawsuit before us concerns benefits that the fund has already been distributed; it asks not the fund, but others, for a subsequent accounting." Id., at __ (dissent slip op. at 9). What this approach ignores is that the funds were not distributed at the death of Dorothy Boggs, which is the relevant time for determining the rights of the parties. This differs from determining the value of the interest of a party after it has been determined what that interest is.
In one of the more enigmatic statements in the opinion, the dissent notes:
|Contrary to the majority's suggestion, Dorothy's children are not the equivalent of plan "participants" or "beneficiaries" see §§1002(7), 1002(8), any more than would be a grocery store, a bank, an IRA account, or any other recipient of funds that have emerged from a pension plan in the form of a distributed benefit, and no one here claims the contrary. Moreover, the children here are seeking an accounting only after the plan participant has died. But even were that not so, any threat the children's lawsuit could pose to plan administration is far less than that posed by the division of plan assets upon separation or divorce, which is allowed under §1056(d).|
Id., at __ (dissent slip op. 10).
With regard to the first sentence of that quotation, it is my reading of the majority opinion that the central point in one of their arguments is that the children are neither "participants" nor "beneficiaries." Comparing the sons' request for an accounting and distribution of assets (whether directly traceable to plan assets or not), to the voluntary decision by a participant or beneficiary to spend (grocery store) or save (bank account or IRA) is misguided at best and specious at worst. No one has suggested that plan assets, once distributed to the appropriate distributee, should not be controlled by that distributee. In the community property context, the issue is the character of the property. The final sentence of the quotation also misses the point. It may be true that division on divorce is more burdensome to plan administration than an accounting action not involving a plan. However, Congress has specifically directed the division on divorce, and has notspecifically directed that the non-participant spouse may dispose of an interest in the participant's plan, even in a community property state.
The dissent rejects the majority's reliance on ERISA's anti-alienation provision:
|The anti-alienation provision is designed to prevent plan beneficiaries from prematurely divesting themselves of the funds they will need for retirement, not to prevent application of the property laws that define the legal interest in those funds. One cannot find frustration of an "anti-alienation" purpose simply in the state law's definition of property.|
Id., at ___ (dissent slip op. at 12). But, as the majority points out, it is not entirely logical that REA prohibits the participant from disposing of his or her interest in derogation of the rights of the non-participant, but Congress did not intend to afford similar protection to the participant. Inexplicably, the dissent proclaims that ERISA does not "restrict what Isaac can do with his pension funds after his death." That is precisely the focus of REA.
In dealing with the argument that Dorothy's transfer violates the anti-alienation clause "or some more general ERISA purpose," the dissent notes, "This argument...is beside the point, however, for the state law action here seeks an accounting that will take place after the death of bothDorothy and Isaac." (emphasis in original). Id., at __ (dissent slip op. at 13). There is no reason that the action had to be delayed until after Isaac's death if Dorothy indeed had an ownership interest in the plan by virtue of Louisiana's community property law. Why could the children not have challenged Isaac to account for the distributions of plan assets in excess of his usufruct interest? And surely, the legal principle is not changed had she not given Isaac a usufruct interest. In that context it becomes much more clear that, if community property law is not pre-empted, Dorothy's beneficiaries would have had a right to require an accounting as soon as any funds were distributed. In all probability, the reality is that the children were unwilling to confront dad with the claim that they had an interest in what he perceived to be his assets. However, there is no legal impediment to seeking an accounting before his death.
"I do not understand," says Justice Breyer,(10) "why or how ERISA could be concerned about Dorothy's creation of a will, which affected the retirement assets only after Isaac received them." Id., at ___ (dissent slip op. at 14). This argument perforce proceeds from the proposition that ERISA prohibits suits against the plan to force distribution of benefits of the non-participant spouse's interest to her beneficiaries, but that a suit for an accounting is not prohibited once the benefits have been distributed to the participant or the participant's beneficiary. How is this possible? Dorothy either has a community interest or she does not. This problem can be illustrated by an example. Suppose Isaac had become entitled to an in-service distribution under the terms of the plan, and Dorothy's will had devised her interest in the plan only to the children. If she had a devisable interest, could her beneficiaries not demand her portion of the benefits which Isaac could take but chose not to take?
Noting that Congress specifically authorized the transfer of pension benefits to a divorced non-participant, Justice Breyer asks, "Why then, one might ask, would Congress object to court orders that transfer benefits to a former spouse after her death?" (emphasis added.) Id., at ___ (dissent slip op. at 16). I could be mistaken, but I do not think the transfer authorized is toDorothy, but rather by Dorothy. This is a distinction with a difference, because Dorothy is not deprived of any benefits during her life.(11) Justice Breyer goes on to note that she could have acquired her share of the pension benefits in a divorce and then she would be free to dispose of them at her death. Of course, the possibility also exists that she could live until those benefits were consumed, and then they would have fulfilled the announced Congressional purpose of REA in providing for the non-participant spouse.
The dissent's next argument is that Louisiana law might provide that the sons' interest does not have to be satisfied out of the pension benefits, but could be satisfied by other assets in Isaac's probate estate. This proposition flies directly in the face of the holding of Free v. Bland, supra.The balance of the dissent is devoted to the proposition that Congress in ERISA had no interest in dealing with other property of the community which might be used to satisfy the heirs of the non-participant spouse. This ignores the reality that it in effect forces the participant to purchase that which Congress set aside to him.
In attempting to make their result appear to be equitable to Sandra, the dissent says:
|In sum, an annuity goes to Sandra, a surviving spouse; but otherwise Dorothy would remain free not only to have,(12) but to bequeath, her share of the marital estate to her children. This reading of the relevant statutory provisions and purposes protects Sandra, limits ERISA's interference with basic state property and family law, and minimizes the extent to which ERISA would interfere with Dorothy's pre-existing property.|
Id, at __ (dissent slip op. at 23). This seems to be a nice, neat formulation, but ignores the complexity of the reality. Sandra is protected only as to the annuity, but all of Isaac's probate estate may go to his children. It takes only a brief moment of consideration to foresee the expense and complexity of the state accounting action and the tracing problems over ten years.(13)
THE REMAINING PROBLEMS:
While Boggs answers the pre-emption issue in general, the opinion does not make clear the scope of pre-emption. Nor does it deal at all with reporting issues on the federal estate tax return.
The latter issue will be dealt with first, since it more easily lends itself to some concrete approaches if not concrete answers. After Boggs, what is to be reported on the federal estate tax return of the predeceasing non-participant spouse? Since the federal estate tax is an excise tax on the privilege of transferring property, it would seem that if the non-participant has no right to transfer, then there is nothing to report on the return. The Service will undoubtedly not like this approach. However, my present view is that the non-participant's interest should not be included in the gross estate, but should be disclosed on the return. Is this entire question academic? After all, even if the non-participant's interest is included in the gross estate, surely it qualifies for the marital deduction. But the non-participant's interest is a classic terminable interest.(14) Even if true, the Service has not been disallowing the marital deduction in a case like this. In other words, whether the non-participant's interest is not reported, or is reported and then deducted on Schedule M, the result is the same.
A more interesting issue is presented if the participant dies first. Is 100% included in the participant's estate? Logically, it should be if no interest is to be reported on the non-participant's return. Suppose the non-participant has consented to the participant's waiver which allows the participant to devise his or her interest to a third party. Has the non-participant made a gift, and if so to what extent? This problem already exists in common law jurisdictions. IRC §2503(f) provides that the execution of a consent to the waiver by a spouse before death is not a gift. See GCM 39858, which authorizes (although in dictum) a disclaimer by the non-participant after the death of the participant. A disposition to the spouse would qualify for the marital deduction.
There is a hot debate going on as to whether the Boggs opinion would apply to an interest rolled over to an IRA before the death of the non-participant spouse. While the opinion talks in terms of "undistributed" benefits, it is not at all clear that such benefits suddenly transmute to community property upon distribution. In fact, the Court itself raises this issue:
|Both parties agree that the ERISA benefits at issue here were paid after Dorothy's death, and thus this case does not present the question whether ERISA would permit a non-participant spouse to obtain a devisable community interest in benefits paid out during the existence of the community between the participant and that spouse.|
Boggs, ___ U.S. at ___ (slip op. at 11-12). Further, the Court concludes its opinion with this comment:
|It does not matter that respondents have sought to enforce their rights only after the retirement benefits have been distributed since their asserted rights are based on the theory that they had an interest in the undistributed pension plan benefits.|
Id., at ___ (slip op. at 22).
The Court seems to be saying that if the benefits can be traced to the qualified plan, the non-participant never had a community interest in those assets and thus one could not suddenly arise. Assume that, during the non-participant's life, the participant rolled the assets over to an IRA. Then, even though an IRA has always been presumed to be a community asset because not subject to ERISA's pre-emption or ant-alienation provisions, well settled community property principles (e.g., the inception of title doctrine) would seem to require that the rollover IRA be treated as separate property. The Court does not say that the non-participant spouse's interest in community property is "suspended." The Court says the interest is never created because community property law is pre-empted. If it was not community property inside the plan, how can it be community property when it comes out of the plan?(15) And this would seem to apply even if the assets were distributed outright so long as the proceeds can be traced.
Of course, the earnings on the assets, will be community property. This would include assets distributed to a rollover IRA unless IRC §408(g)(16) applies. I have long believed that this section is an income tax section and that the purpose of it was to prevent couples in a community property state from double-dipping, by attributing one-half the earnings of the working spouse to the non-working spouse so that two IRAs could be established. However, counsel for the petitioner in Boggs believes that the scope of the section is much broader.
Boggs has now clarified that assets inside a qualified plan are not subject to community property laws. It has left unanswered the question as to how to deal with that interest for federal estate and gift tax purposes. More importantly, it has not explicitly answered the question as to whether the assets, once distributed, are community property.
1. This was written within less than two weeks after the opinion and thus the author reserves the right to change his mind upon further reflection.
2. This design can be seen in the tax effects of qualified plans. The participant is normally required to begin taking distributions at 70-½ (with certain limited exceptions added by the Jobs Protection Act). At the participant's death, the property can pass to the spouse virtually tax free, and in most cases the spouse can start a new life expectancy calculation. At the death of the spouse, when the property passes to the next generation, the combination of income taxes and estate taxes results in the next generation receiving only 20% to 30% of the gross value of the plan, even with the best of planning.
3. A usufruct interest is roughly equivalent to a common law life estate, and the naked ownership is roughly equivalent to a remainder interest.
4. Although the opinion is unclear, it is presumed that Sandra was the beneficiary of the IRA.
5. Judge Jacques Weiner, joined by five of his colleagues, wrote an articulate dissent to the Court's refusal to grant an en banc rehearing. 89 F.3d 1169 (1996).
6. It took the Ninth Circuit 15 months to write Ablamis, and it took the Fifth Circuit 18 months to write Boggs.
7. This argument was made in an amicus brief by the Estate Planning, Probate and Trust Law Section of the State Bar of California supporting Respondent.
8. In a somewhat gratuitous, but realistic point, the Court says: "If the couple had lived in several states, the accounting could entail complex, expensive, and time-consuming litigation. Congress could not have intended that pension benefits from pension plans would be given to accountants and attorneys for this purpose." Id., at ___ (slip op. at 21). Actually, the accounting litigation in this case promised to meet the three prong test of "complex, expensive, and time consuming."
9. Ironically, the plaintiff had worked sufficient hours in the year of his discharge to cause his benefits to vest.
10. And I agree with that with respect to this opinion.
11. As one of my client's reminded me, "You never saw a hearse with a luggage rack."
12. I suppose here the dissent is speaking existentially.
13. Although a "taking" argument was raised in oral argument, that argument does not appear in either opinion until the penultimate paragraph of the dissent, and then only under a "Cf." to two cases. Evidently, the Court did not want to go down the slippery slope of taking by pre-emption in view of the argument that REA itself may well have been a taking.
14. IRC § 2039(c), prior to its repeal by the Tax Reform Act of 1986, provided that any interest of a non-participant spouse in a retirement plan, which interest was obtained solely as a result of community property law, was not includable in the estate of the non-employee spouse upon such spouse's death. The result of the repeal of this section prior to Boggs was thought to be that the one-half community interest of the non-employee spouse is includable in that spouse's estate if the non-participant spouse predeceases the participant. The Senate explanation of the repeal states, "However, the bill clarifies that, if a transfer is made to an employee spouse by a non-employee spouse in a community property state, the amount transferred is eligible for the unlimited marital deduction (§§2056 and 2523)." No such provision was to be found anywhere in the statutes and no subsequent tax law (of which there have been many) corrects this oversight, except TAMRA's amendment to §2056(b)(7) which is limited to joint and survivor annuities.
Now, Ways and Means Chairman Archer's "Chairman's Mark of the Tax Simplification Provisions," (6/9/97) deals with this problem in Section VII., Paragraph 14. In a magnificent understatement, the Mark notes "[T]he transfer tax treatment of married couples residing in a community property state is unclear where either spouse is covered by a qualified plan." The proposal would clarify that the interest of the non-participant spouse "attributable to community property laws" which passes to the participant qualifies for QTIP treatment. This applies to interests in IRAs and SEPs also. Those are not "qualified plans." Effective for estates of decedent's dying after the effective date of the Act.
Does this mean that Congress intended for the non-participant to have a community property interest of which such spouse could dispose? That is giving Congress too much credit. After all, it took them 11 years to propose a remedy the Senate recognized in its own report.
15. One answer to that might be to apply the analysis used in Marshall v. Marshall, 735 S.W.2d 587 (Tex. App. Dallas 1987). I am not sure that the reasoning in that case is sound in any event, nor am I sure that it is applicable in this context.
16. "This section  will be applied without regard to community property laws."
Copyright 1998 by Glenn M. Karisch Last Revised May 15, 1998