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U.S. Supreme Court Upholds Constitutionality of Minnesota Automatic Revocation of Beneficiary Designation Statute

| Jun 15, 2018 | Firm News, Trust & Estates |

On June 11, 2018, the United States Supreme Court upheld the retroactive application of a 2002 Minnesota statute which established a default rule that “the dissolution or annulment of a marriage revokes any revocable…beneficiary designation…made by an individual to the individual’s former spouse.” Minn. Stat. § 524.2-804, subd. 1. Under the statute, a beneficiary designation by one spouse naming the other a beneficiary of a life insurance policy or similar asset, is automatically revoked by a divorce of the spouses, leaving proceeds to the contingent beneficiary or to the estate of the deceased policy owner.

The case analyzed the retroactive application of the 2002 statute to a beneficiary designation made prior to enactment of the statute. The U.S. Supreme Court decision resolves a split of authority on the issue and held that the Minnesota revocation-on-divorce statute did not “substantially impair pre-existing contractual arrangements.”

In the case, the decedent obtained a life insurance policy in 1998, naming his then-wife as a beneficiary and his children as contingent beneficiaries. The dissolution decree issued when the marriage ended in 2007 did not mention the insurance policy and the decedent took no action to change the designation. Decedent’s children argued that Minnesota’s revocation-on-divorce law removed the ex-spouse as primary beneficiary, leaving them as the rightful recipients. The ex-spouse argued that the 2002 law did not exist when the designation was made in 1998 and therefore violated the U.S. Constitution’s Contracts Clause, which restricts the powers of states to interfere with contractual arrangements. The Court agreed with the decedent’s children, stating that the retroactive application of Minnesota’s statute did not violate the Contracts Clause.

In its analysis, the Court applied a two-step test. The first step asked whether the state law “operated as a substantial impairment of a contractual relationship.” If there were a substantial impairment, the inquiry would turn on whether the state law was drawn in an “appropriate” and “reasonable” way to advance “a significant and legitimate public purpose.” Here, the Court stopped after the first step, because the law did not substantially impair preexisting contractual arrangements. The Court determined that the law was designed to reflect a policyholder’s intent; it applied the presumption that a spouse would not want a former spouse to benefit from a beneficiary designation for a life insurance or similar policy. The Court noted that the statute’s presumption could be overcome if the policy holder were to make a new beneficiary designation after the divorce. Therefore, the law supported, rather than impaired, the contractual scheme. In addition, the default provision removing an ex-spouse results in the proceeds being redirected to contingent beneficiaries, which does not extinguish the policy holder’s contractual rights.

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