Beneficiary designations are an important part of estate planning. I have written several times in the past on the importance of keeping your beneficiary designations up to date. I recommend that your beneficiary designations should be reviewed annually to make sure they continue to meet your wishes. This week the United States Supreme Court again spoke on the issue of beneficiary designations and divorce in the case of Sveen v. Melin.
In 1998 Mark Sveen purchased a life insurance policy, naming his then wife, Kaye Melin, as the primary beneficiary and designating his two children from a prior marriage, Ashley Sveen and Antone Sveen, as contingent beneficiaries. Sveen and Melin divorced in 2007. The divorce decree did not mention the insurance policy and Sveen never changed his beneficiary designations. Sveen passed away in 2011. Melin and Sveen’s children both made claims to the insurance proceeds. In 2002, Minnesota, like many states, adopted a statute that established a presumption of revocation of a beneficiary designation naming a spouse upon the dissolution or annulment of the marriage. The Sveen children argued that Minnesota’s statue applied and that the divorce revoked the designation of Melin as a beneficiary. Melin asserted that because the law did not exist when the policy was purchased, applying the later-enacted law violates the Contracts Clause of the United States Constitution. The District Court awarded the insurance money to the Sveens, but the Eighth Circuit reversed, holding that the retroactive application of Minnesota’s law violated the Contracts Clause.
The opinion written by Justice Kagan begins by citing Ambrose Bierce: “All good trust-and-estate lawyers know that ‘death is not the end; there remains the litigation over the estate.’” As a result, Justice Kagan explains: “the legal system has long used default rules to resolve estate litigation in a way that conforms to decedents’ presumed intent.” However, Art. I, §10, cl. 1 of the United States Constitution provides: “no State shall . . . pass any . . . Law impairing the Obligation of Contracts. . . .” In an 8-1 decision, the Supreme Court held that while the Contracts Clause “restricts the power of States to disrupt contractual arrangements”, it does not prohibit all laws affecting pre-existing contracts. The Court went on to decide that the retroactive application of the Minnesota statute did not violate the Contracts Clause. As a result Mr. Sveens’ children received the proceeds of the policy.
The decision and the dissent are interesting reads for those interested in the finer nuances of the Contracts Clause. For purposes of your estate planning, the decision is just one more reminder of the need regularly review and update your beneficiary designations.