What You Should Know About Designated Beneficiaries
A recent US Supreme Court case, Sveen v. Melin, 138 S.Ct. 1815 (2018), highlights why it's important to know how designated beneficiaries work in your state and what happens when certain life events, such as divorce or death, occur.
Mark Sveen and Kaye Melin were married in 1997. The next year, Mark purchased a life insurance policy naming Kaye as the primary beneficiary, and his two children from a prior marriage, Ashley and Antone Steeve, as contingent beneficiaries. Mark and Kaye divorced in 2007, but the divorce decree made no mention of the insurance policy and Mark never revised his beneficiary designations on the life insurance policy.
After Mark passed away in 2011, both Mark's children and Kaye made competing claims to the insurance proceeds. Minnesota (where Mark was domiciled at the time of his death) has a revocation-on-divorce statute which was enacted in 2002. Mark's children claimed that Mark's divorce canceled Kaye's beneficiary designation, and therefore, the proceeds should go to the named contingent beneficiaries, Mark's children. However, Kaye argued that because the statute was not in effect at the time the insurance policy was purchased, it should not retroactively apply.
The Court held that the children should inherit the life insurance proceeds reasoning that retroactively applying the statute did not violate the Constitution's Contracts Clause, but since this is not a first year Constitutional Law class, we'll focus on what this means for you and your estate plan.
Revocation-on-divorce statutes are an example of default rules long used by the legal system to resolve estate litigation in a way that the court presumes the decedent (person who has died) intended.
Under the Minnesota statute, if one spouse has made the other spouse a beneficiary of a life insurance policy or similar asset, their divorce automatically revokes that beneficiary designation. The proceeds from the insurance policy or similar asset will then either go to the contingent beneficiaries, if named, or the policyholder's estate upon death. In enacting this statute, the Minnesota legislature presumed that this is what the policyholder would want. However, the policyholder does have the option to rename the ex-spouse as the designated beneficiary after the divorce is finalized.
The one dissenting Justice in this opinion makes a few very good points, though. Justice Gorsuch points out that the statute's presumed purpose is to protect policyholders from their own negligence if they forget to change their beneficiary designations upon divorce, but the statute also presumes that policyholders pay enough attention to their beneficiary designations to ensure that if they want their ex-spouses to remain as beneficiaries, they reaffirm this designation.
The majority of the Court assumed that policyholder's would prefer the default rule put in place by the revocation-on-divorce statute. However, Justice Gorsuch listed various reasons why a policyholder may prefer to keep an ex-spouse as a beneficiary on a policy including, “a sense of obligation, remorse, or continuing affection, or to help care for children of the marriage that remain in the ex-spouse's custody.”
In recent years, the prevalence of revocation-on-divorce statutes has been increasing. At least half the states have enacted revocation-on-divorce statutes, but that means that the other half have not. Additionally, most states now have enacted laws that provide for automatic revocation of dispositions for a former spouse in a will that was executed prior to the divorce.
An experienced estate planning attorney can work with you to develop an estate plan that incorporates all of your wishes in light of the ever-changing applicable state law. Remember, it matters where you live, and sometimes where you die, in determining which state law will apply.
This case also highlights how important it is to ensure you update your estate plan every three or four years, and especially when a life event occurs, such as a birth, death, or divorce. It's important to do so so that your family members do not end up in a 7 year court battle like this family did.
For more information on Why You Need an Estate Plan, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (855) 451-1260 today.