U. S. Supreme Court Rules on Life Insurance/IRA Divorce Statute…Clarity for Practitioners and Clients
A recent blog discussed the issue in the Sveen v. Melin case which has now been decided by the Supreme Court of the United States (the “Court”). The Court determined that a Minnesota statute (similar to Florida’s statute) is constitutional under the Contracts Clause of the United States Constitution (the “Contracts Clause”). This statute provides that a life insurance beneficiary designation naming a former spouse is automatically revoked when the policy holder and the spouse divorce.
As a reminder, Mark Sveen and Kaye Melin divorced in 2007. Prior to the divorce, Mark named Kaye as the primary beneficiary of his life insurance policy, with his children, Ashley and Antone, as contingent beneficiaries. The divorce decree did not mention this life insurance policy or the consequences, if, upon the death of Mark, he took no action in changing the beneficiary designation.
Upon Mark’s death, Kaye claimed that she was the beneficiary of the life insurance policy, while Ashley and Antone claimed they were beneficiaries because the Minnesota statute revoked the primary beneficiary designation as of Mark and Kaye’s divorce.
The Court addresses the public policy behind the Minnesota statute. Most divorcing spouses do NOT want the former spouse to be the beneficiary of their life insurance policy. Further, if they want a former spouse to be a beneficiary, a policy holder can easily prepare a new beneficiary designation naming the former spouse as a beneficiary.
The public policy of voiding transfers after divorce is affirmed in will and trust legislation providing that, upon divorce, the former spouse is deemed to have predeceased the decedent. Florida has such legislation for wills and trusts.
Melin argued that the Minnesota statute violates the Contracts Clause which restricts the powers of states to impair contractual arrangements. As the Contracts Clause applies to any contract, including life insurance contracts, Melin argued that the Minnesota statute retroactively changes the terms of the contract (i.e., the beneficiary designation).
The Court, in analyzing the impairment to the contract under the Contracts Clause, uses a 2 step test. First, the Court considers whether the state statute operates as a substantial impairment of a contractual relationship. Second, if the Court finds a substantial impairment, then is the state law drafted in an appropriate and reasonable way to advance a significant and legitimate public purpose? In analyzing the Minnesota statute, because the Court determines that the first test is not met, the Court does not reach the second test.
The Court determines that the statute does NOT substantially impair pre-existing contractual arrangements. The statute is designed to reflect the policy holder’s intent and thus supports, rather than impairs the contract. The statute is unlikely to disturb any policy holder’s expectation because the statute does no more than a divorce court could have done. A divorce court could have easily required a beneficiary designation be revoked or changed. Further, the statute is merely a default rule. A policy holder can easily override the statute by preparing a new beneficiary designation designating the former spouse as beneficiary.
Citing prior cases, the Court determines that laws imposing “such minimal paperwork burdens” do not violate the Contracts Clause. “[W]ith only ‘minimal’ effort , a person can ‘safeguard’ his contractual preferences.”
ADVICE: This Supreme Court case is a great read, especially for practitioners like this author, who do not routinely read constitutional law cases, especially those interpreting the Contracts Clause. The positive outcome allows Florida individuals to have more confidence relying on the Florida’s statute. This author, a member of the drafting committee, breathes a sigh of relief.
Family lawyers also should take note that ALL beneficiary designations should be addressed in a marital settlement agreement. While it is not always easy to remember estate planning issues in a family law context, consideration of beneficiary designations should be on a family lawyer’s checklist. Further, for estate planning attorneys, if a client WANTS to have a former spouse named as a beneficiary, then attorneys must advise the client to prepare a new beneficiary designation.
Justice Gorsuch, the only dissenting Judge, wrote an 11 page dissent to the 14 page opinion. It is helpful to read the dissent to clarify the issues.
WORD OF THE WEEK: “Obiter dictum” is a Latin term which means “something said in passing”. When a judge renders an opinion, the judge may make a comment that is not necessary to a decision in the case and, therefore not considered precedent in future cases. However, the comment may be persuasive in later cases. Lawyers often refer to these “comments” as dicta.
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