The Supreme Court of the United States recently held in Sveen v. Melin that the retroactive application of a revocation-upon-divorce statute to a contract signed before the statute’s enactment does not violate the Contracts Clause of the United States Constitution.
The background of the case involved Mark Sveen designating his spouse, Kaye Melin, as primary beneficiary of Sveen’s life insurance policy, with his children as contingent beneficiaries. After the policy had gone into effect, Minnesota legislature passed Minn. Stat. § 524.2-804 – a law which automatically revokes the designation of a former spouse as a life insurance policy beneficiary upon divorce. Sveen and Melin subsequently divorced, and Sveen later died. At Sveen’s death, the life insurance policy still listed Melin as primary beneficiary.
A federal district court found that Melin’s beneficiary status had been revoked pursuant to the Minnesota revocation-upon-divorce statute even though: (1) Melin was listed as the beneficiary prior to the statute having gone into effect; and (2) at the time that the policy went into effect, beneficiary designations were not revoked automatically absent a divorce decree specifically ordering it.
On appeal, the United States Court of Appeals for the Eighth Circuit found that Sveen’s rights under the Contracts Clause had been violated via the retroactive application of the statute. The Eighth Circuit’s ruling; however, was ultimately reversed by the Supreme Court of the United States by an eight-to-one vote, whereby the Supreme Court concluded that no violation of the Contracts Clause occurred through retroactive application of the revocation-upon-divorce statute.
The majority opinion was authored by Justice Elena Kagan, who stated, “The legal system has long used default rules to resolve estate litigation in a way that conforms to the decedents’ presumed intent.” She detailed that “revocation-on-divorce statutes treat an individual’s divorce as voiding a testamentary bequest to a former spouse;” and that those laws “presume, in other words, that the average Joe does not want his ex inheriting what he leaves behind.”
The Supreme Court relied upon a two-step test in determining whether the state law violated the constitution: whether the law operated as a substantial impairment of a contractual relationship, and if so; whether the state law was drawn in an appropriate and reasonable way to advance a significant and legitimate public purpose. Here, the Court did not turn to the second step of the test because of finding that there was no substantial impairment.
Particularly, the Supreme Court revealed that the statute was geared towards reflecting the intent of the policyholder; it honored, not undermined, the intent of the contracting party. Second, the statute did not likely disturb the expectations of the policyholder at the time the contract was consummated because of the insured not being able to reasonably depend on a beneficiary designation remaining intact following a divorce. Finally, the statute simply created a default rule that the policyholder could undue by filing a change-of-beneficiary form.
Florida has effected a statute which directly addresses the effect of a divorce on beneficiary designations of will substitutes. According to Fla. Stat. § 732.703, a designation made by or on behalf of the decedent providing for the payment or transfer at death of an interest in an asset to or for the benefit of the decedent’s former spouse is void as of the time the decedent’s marriage was judicially dissolved or declared invalid by court order prior to the decedent’s death, if the designation was made prior to the dissolution or court order. The decedent’s interest in the asset shall pass as if the decedent’s former spouse predeceased the decedent. This applies to: (a) a life insurance policy, qualified annuity, or other similar tax-deferred contract held within an employee benefit plan; (b) an employee benefit plan; (c) an individual retirement account; (d) a payable-on-death account; (e) a security or other account registered in a transfer-on-death form; and (f) a life insurance policy, annuity, or other similar contract that is not held within an employee benefit plan or a tax-qualified retirement account.
If you would like to discuss how these beneficiary designation issues might apply to you, feel free to contact The Law Office of Stephen D. Dunegan, P.A. and we will be happy to schedule an appointment.