Recent U.S. Supreme Court Decision Highlights the Need to Update Estate Plans and Beneficiary Designations Following A Marital Dissolution
Sveen v. Melin, 138 S. Ct. 1815 (U.S. Jun. 11, 2018).
This decision applied the two-step test for determining Contracts Clause violations with respect to the retroactive application of a Minnesota law which established a default rule of automatic revocation of beneficiary designation upon divorce. The Supreme Court upheld the retroactive application.
Enacted in 2002, Minnesota’s revocation-on-divorce statute is grounded on the legislative presumption that most divorcees do not aspire to enrich their former partners and failure to change an insurance policy beneficiary after a divorce is more likely the result of neglect than choice. It is therefore designed to give effect to the policyholder’s intent. Id. at 1820.
Mark Sveen and Kaye Melin wed in 1997. A year later, Sveen purchased a life insurance policy, naming Melin as primary beneficiary and designating his two children from a prior marriage as contingent beneficiaries. In 2007 the Sveen-Melin marriage ended. The divorce decree made no mention of the insurance policy, and Sveen took no action to revise his beneficiary designations prior to his death in 2011. Id. at 1817.
The Sveen children and Melin made competing claims to the insurance proceeds. The Sveen children contended that Minnesota’s statute canceled Melin’s beneficiary status, while Melin contended that retroactive application of the later-enacted law to her ex-husband’s pre-existing policy would violate the Constitution’s Contracts Clause, which prohibits any state law from impairing the obligation of contracts. U.S. Const., Art. I, §10, cl. 1. Id. at 1817-18.
The Supreme Court applied a two-step test to determine when retroactive application of such a law is unconstitutional. The first step asks whether the state law has operated as a “substantial impairment” of a contractual relationship. This is demonstrated by the extent to which the law undermines the contractual bargain, interferes with a party’s reasonable expectations, and prevents the party from safeguarding or reinstating his rights. The second step asks whether the state law is drawn in an “appropriate” and “reasonable” way to advance “a significant and legitimate public purpose.” Id. at 1822-23.
The Court failed to reach the second step, as it found the first step had not been met. Though the Court acknowledged Minnesota’s statute makes significant change to contractual arrangements, it nevertheless decided the law does not substantially impair pre-existing contractual arrangements. Id. The Court reasoned that (1) a law that gives effect to the policyholder’s intent supports, rather than impairs, the contractual arrangement; (2) the law is unlikely to disrupt policyholders’ expectations because an insured cannot reasonably rely on a beneficiary designation remaining in place after a divorce – the law does no more than a divorce court can; and (3) the statute creates a mere default rule, which can be simply undone by the policyholder “with the stroke of a pen.” Id. at 1823.
The Court relied heavily upon its long history of upholding laws imposing only minimal paperwork burdens outside the contract. Melin urged the Court to distinguish between Minnesota’s law that directly changes express terms of a contract and previously-upheld laws that impose consequences for failing to abide by a procedural obligation extraneous to the agreement. The Court found no meaningful distinction among the laws – holding that the dispositive feature of these laws is the imposition of consequences for not satisfying a burden outside the contract. Id. at 1825-26.
Justice Gorsuch alone dissented, contending the standard should be “any impairment,” rather than “substantial impairment.” But even under modern precedents, he contends, impairment caused by the Minnesota statute is substantial because the beneficiary of a policy is the “whole point” of the agreement. Id. at 1826-27.