You meet the man/woman of your dreams.  You marry.  You name your spouse beneficiary of your IRA, life insurance, 401(k), etc.

Fast forward a few years.  Your marriage is one of the almost half that end in divorce.  You forget to change the beneficiary of your IRA, life insurance, 401(k), etc.

Fast forward a few more years.  You aren’t paying attention crossing the street and step out in front of a bus.  Good thing you took harp lessons as a child.

As your spirit floats towards the sky you realize you never changed the beneficiary of your non-probate assets.  Oh well, too late to do anything about it now.

Enter the government.  Currently there are 26 states that have enacted statutes revoking beneficiary designations upon divorce.  Are such statutes constitutional?  Will they pass a legal challenge?

Sveen v. Melin, U.S. Supreme Court, No. 16-1432

Decided in June this case ruled overwhelmingly (8 to 1) to support a Minnesota statute removing an ex-spouse as beneficiary of a life insurance policy.  The statute was ruled constitutional and life insurance proceeds were awarded to the policy’s contingent beneficiaries – children from a prior marriage.

A case synopsis:

  • In 1997 Mark Sveen and Kaye Melin were wed.
  • In 1998 Mark purchased a life insurance policy.  He named Kaye as the primary beneficiary – his two children from a prior marriage as contingent beneficiaries.
  • In 2002 Minnesota amended its probate code applying its revocation upon divorce statute to life insurance beneficiary designations.
  • Mark and Kaye divorced in 2007.  Mark did not update/change the beneficiary of his life insurance policy.
  • Mark died in 2011.

After Mark’s death his children claimed the life insurance proceeds arguing the Minnesota statute removed Kaye as beneficiary.  Kaye countered the statute did not apply as it was passed in 2002 after Mark purchased the policy and named her as beneficiary.  She argued application of a 2002 law to a 1998 contract would be unconstitutional.

Court ruling:

The lone dissenter (1) argued the Minnesota statute interfered with the life insurance contract.  It is long established that the power of states to interfere with or disrupt contractual arrangements is restricted.

The majority (8) ruled the statute constitutional and applicable to the case on the following grounds:

  • It reflects Mark Sveen’s intent in that most individuals after divorce would disinherit their ex-spouse.  The court stated “…the insured’s failure to change the beneficiary after a divorce is more likely the result of neglect than choice.”
  • It provides a default.  It applies only if a policyholder does not update the beneficiary form.  If Mark Sveen had updated the form nothing in the law would stop him from going ahead and renaming his ex-wife after the divorce (as unlikely as it is he would do so).

Implications:

While Sveen v. Melin addressed life insurance proceeds could the ruling apply to IRAs, 401(k)s and other retirement accounts?  The Court says this ruling applies to “similar” assets.  According to the Court, “under the statute, if one spouse has made the other the beneficiary of a life insurance policy or similar asset, their divorce automatically revokes that designation so that the insurance proceeds will instead go to the contingent beneficiary or the policyholder’s estate upon his death.”  So, yes, there’s a gray area where it can be legitimately argued that the ruling applies to IRAs, 401(k)s, pensions and the like.

Beware ERISA.  Sveen v. Melin addressed a state statute.  When it comes to retirement programs enacted under federal law (i.e. ERISA) precedent suggests the named beneficiary must be the recipient despite any state laws to the contrary.  Had this been a 401(k) Sveen’s ex-wife Melin would have received the proceeds.