In Sveen et al. v. Melin, the U.S. Supreme Court upheld the retroactive application of a Minnesota statute automatically revoking life insurance beneficiary designations made by an individual to the individual’s former spouse on divorce, holding that retroactive application of such a statute doesn’t violate the Constitution’s Contracts Clause. The Supreme Court’s decision has implications for the continued application and adoption of similar statutes in other states and consideration of these provisions by both estate planning and family law practitioners advising clients post-divorce.
Insurance Policy Purchased
The respondent, Kaye Melin, married Mark Sveen in 1997. In 1998, Sveen purchased a life insurance policy naming Melin as the primary beneficiary and his two children from a prior marriage as the contingent beneficiaries. In 2002, the Minnesota legislature enacted Minn. Stat. Section 524.2-804, which automatically revokes any beneficiary designation made by an individual designating the individual’s former spouse as the beneficiary on divorce. Prior to the enactment of that statute, which includes the period during which Sveen purchased the policy, divorces didn’t automatically revoke beneficiary designations unless specifically ordered by the divorce decree. In 2007, the couple divorced. The divorce decree didn’t address the life insurance policy, and Sveen never changed the beneficiary designation on the policy subsequent to the divorce.
Children Claim Insurance Proceeds
Sveen died in 2011, and as the Supreme Court’s majority opinion rightly found, “[a]ll good trust-and-estate lawyers know that ‘[d]eath is not the end; there remains the litigation over the estate.’”1 Both Sveen’s children and claimed the insurance proceeds. The children argued that when Minn. Stat. Section 524.2-804 was applied to the policy, the designation of Melin as the primary beneficiary was revoked, and they were therefore entitled to the proceeds as the contingent beneficiaries. Melin argued that applying Minn. Stat. Section 524.2-804, which was enacted after the policy was purchased and Sveen’s designation of Melin as the primary beneficiary, would violate the Contracts Clause of the U.S. Constitution, which states that “No State shall … pass any … [l]aw impairing the Obligation of Contracts ….”2 In short, they argued that Sveen had a contract (that is, the policy) with the insurance company and that the law passed after the policy was acquired interfered with its operation by changing an express term of the contract: the beneficiary designation. The District Court ruled in favor of Sveen’s children, but the U.S. Court of Appeals for the Eighth Circuit ruled in favor of Melin, holding that the retroactive application of the Minnesota law to Sveen’s designation violates the Contracts Clause.
Contracts Clause Analysis
In an 8-1 decision, with Justice Neil Gorsuch as the sole dissenter, the Court reversed the Eighth Circuit’s decision and applied the longstanding two-step test articulated in Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, to determine whether a state law violates the Contracts Clause.3 The first step of the inquiry examines whether the law operates as a substantial impairment of a contractual relationship. To determine this issue, the Court considers whether it undermines the parties’ contractual bargain, interferes with a party’s reasonable expectations, and prevents a party from safeguarding or reinstating the party’s rights. If these factors indicate that the state law operates as a substantial impairment, the second step of the inquiry examines whether the state law is drawn in an appropriate and reasonable way to advance a significant and legitimate public purpose.
In the majority opinion, Justice Elena Kagan writes that Melin’s claim doesn’t reach the second step of the two-step test as the Minnesota statute doesn’t operate as a substantial impairment of a contractual relationship.4 The Court acknowledges that the law certainly changes how the insurance contract operates, but doesn’t impair the contract. The Court evaluated three primary considerations in making this determination: First, the statute is intended to further the contractual intent by supplementing the presumed intent of most policyholders under such circumstances. The Court notes that “[a]lthough there are exceptions, most divorcees do not aspire to enrich their former partners.”5 Second, the law doesn’t upend the expectations of policyholders as divorce courts have wide latitude in making determinations as to the division of property pursuant to a divorce, and the policy designation could always have been changed pursuant to a divorce decree. A policyholder can’t reasonably rely on beneficiary designations remaining unchanged in the event of a divorce, which weakens an argument for protections under the Contracts Clause. Third, even if a particular policyholder doesn’t intend to revoke the designation of a divorced spouse as the beneficiary of the policy proceeds, the policyholder can always change the beneficiary designation following the divorce by submitting the proper paperwork to the insurance company. The Court notes that statutes that enable a party to protect the party’s contractual rights from the operation of the statute with minimal effort have always passed constitutional muster.6
As the lone dissenter, Justice Gorsuch’s focus is on the retroactive nature of the Minnesota statute as he agrees such a statute can apply to policies purchased after the enactment of a statute. He believed there was a logical inconsistency in the majority’s position that statutes like this are passed because people are inattentive to their policies’ beneficiary designations, but such statutes are constitutional because those same individuals will be attentive to the beneficiary designation if they don’t like the result of the operation of the state statute. The dissent relies on policyholders understanding what will happen to their policies on divorce and making decisions to enter the contract on those terms. However, Justice Kagan’s opinion states that the majority “venture[s] to guess that few people, when purchasing life insurance, give a thought to what will happen in the event of divorce … [s]o his reliance interests are next to nil.”7 The majority’s view of how life insurance policies are scrutinized and purchased is grounded in reality, while the dissenting view would come as a surprise to many practitioners and policyholders alike.
Rights vs. Remedies
Melin argued that the present case should be distinguished based on the point that the Minnesota statute operates on the contract itself by directly changing an express term of the contract, whereas precedential cases involved a state statute that interfered with the ability to enforce contractual rights against others. Essentially, Melin asserted that the precedential cases focus on statutes affecting the remedies of a contracting party, whereas the Minnesota statute affects the rights of a contracting party. However, the majority rejected this argument, finding no dispositive distinction between the present case and those cited by Sveen.8 The Court notes that like the Minnesota statute, the statutes involved in precedential cases added obligations that weren’t part of the express terms of the contract. The failure to satisfy these obligations led to the party failing to gain the benefits of the contract. The Court cited Texaco, Inc. v. Short, which stood for the proposition that when the results of eliminating a remedy and extinguishing a right are identical, the same Contracts Clause analysis will apply.9 Accordingly, what the majority finds instructive is that the statutes cited and the Minnesota statute all had the common feature of requiring some kind of action to maintain the benefits of the contract after application of the statute in question. It’s this common feature that’s determinative.
Implications of the Decision
This decision has important implications in both the trusts and estates and family law contexts. As the majority opinion noted, the question at issue essentially involves the constitutionality of a revocation on divorce provision for a will substitute.10 The law has long recognized the validity of provisions that revoke or modify testamentary instruments as a result of a divorce. However, a life insurance policy isn’t a testamentary instrument—it’s a contract, and therefore its retroactive application must pass constitutional muster under the Contracts Clause analysis, whereas testamentary instruments don’t. While it’s a new question, the Court found that it had the same result as the validity of laws that impact testamentary instruments as such a statute “often honors, not undermines, the intent of the only contracting party to care about the beneficiary term.”11
Minn. Stat. Section 524.2-804 is a statutory codification of Uniform Probate Code Section 2-804, which provides for the automatic revocation of beneficiary designations upon divorce.12 As noted by the amicus brief filed by the American College of Trust & Estate Counsel, 16 states had substantively identical statutes to the UPC provision at the time of filing of the brief.13 Fourteen states had statutes with substantially similar provisions to the UPC provision or statutes that are drafted differently than the UPC provision but achieve similar results.14 The Sveen decision resolved a split of authority examining this question whereby the Eighth Circuit in this matter (as well as a state supreme court decision in another case) held that retroactive application of such statutes is impermissible, while other circuit courts and state supreme courts (including the Ninth Circuit, Tenth Circuit and two state supreme courts) reached the opposite conclusion regarding statutes with substantively identical provisions.15 The UPC provision reflected the idea that a typical divorced spouse wouldn’t want the former spouse to benefit and that the failure to change the beneficiary designation is likely caused by “‘inattention’ not ‘intention.’”16 However, when this presumption is incorrect, the policyholder can always change the presumption by submitting the appropriate paperwork to the insurer. Accordingly, these statutes are meant to effectuate the intent of most policyholders, but they don’t prevent policyholders from keeping a divorced spouse as a policy beneficiary.
In states with legislation similar to Minn. Stat. Section 524.2-804 and the UPC Rule, Sveen serves as confirmation that these statutes pass constitutional muster, and any beneficiary designations should be revisited after divorce if the circumstances require (for example, if the policyholder wishes to continue benefiting a former spouse with shared custody of children). In states without similar legislation, the Sveen case i a reminder that beneficiary designations will most likely need to be changed on divorce to accurately reflect the intent of the policyholder, and “inattention” may lead to unintended results on the death of the insured. Even though the automatic revocation provision was upheld, presumably resulting in Sveen’s true intent being achieved, this case is an example of how some proactive planning (that is, filing a change of beneficiary form) could have avoided or at least reduced litigation that ultimately went to the highest court in the nation. Lastly, given that Sveen confirms the constitutionality of these statutes, legislatures may be encouraged to enact similar statutes. Trusts and estates and family law practitioners should be mindful of continued developments in this area and advise clients accordingly on divorce. Further, Sveen has applicability beyond the insurance context; these statutes also apply to other types of dispositions and beneficiary designations made to an individual's spouse.
1. Sveen et al. v. Melin, 584 U.S. ___ (2018), slip op. at 1 [hereinafter “Opinion”].
2. U.S. Const. Art. I, Section 10, cl. 1.
3. Opinion at 2.
4. Opinion at 7.
5. Opinion at 8.
6. Opinion at 8, n.3.
7. Opinion at 10.
8. Opinion at 13.
9. Opinion at 14 (citing Texaco, Inc. v. Short, 454 U.S. 516 (1982)).
10. Opinion at 2–3.
11. Opinion at 9.
12. Opinion at 3; Uniform Probate Code § 2-804.
13. Brief of Amicus Curiae American College of Trust & Estate Counsel at p.13.
15. Opinion at 6.
16. Opinion at 3.