In recent years, the prevalence of revocation-on-divorce statutes, in which dissolution or annulment of a marriage automatically revokes provisions related to a former spouse in an instrument executed prior to the event, has been increasing. Most states have enacted laws that provide for automatic revocation of dispositions for a former spouse in a will executed prior to divorce. With the rise of will substitutes, similar issues have arisen with instruments governing nonprobate transfers, including revocable trusts, life insurance policies, and retirement accounts. In response to this trend and similar statutes enacted by multiple states, the 1990 revisions to the Uniform Probate Code (UPC) expanded the application of its revocation-on-divorce provision from wills to revocable living trusts, life insurance policies, retirement accounts, transfer-on-death accounts, and similar accounts. The drafters of the UPC revisions explained that this expansion was an attempt to “unify the law of probate and nonprobate transfers.” By 2018, 26 states had adopted the UPC revocation-on-divorce provision or a similar statute.
Most courts agree that there is no violation of the Contracts Clause of the U.S. Constitution when these laws are applied prospectively — that is, when the laws are applied to life insurance and similar contracts entered into after enactment of the laws. But Sveen v. Melin answers a different question: Does the retroactive application of revocation-on-divorce statutes to contracts entered into prior to enactment of the statutes violate the Contracts Clause?
II. Facts of the Case and Procedural Posture
The underlying facts of Sveen are simple. In 1997, Ashley Sveen bought a life insurance policy insuring his life, and later that year he married Kaye Melin. In 1998, Sveen named Melin as primary beneficiary on the policy and named his two adult children from a previous marriage as contingent beneficiaries. In 2002, Minnesota amended its revocation-on-divorce statute, which previously had only applied to wills executed prior to dissolution or annulment of marriage, to include “any revocable: (1) disposition, beneficiary designation, or appointment of property made by an individual to the individual’s former spouse … .” Sveen and Melin divorced in 2007, but Sveen never changed the beneficiary designations on his life insurance policy. When Sveen died in 2011, the life insurance company filed an interpleader requesting a judgment on who should be the recipient of the life insurance proceeds: Melin or Sveen’s children.
Sveen’s children moved for summary judgment, contending that the revocation-on-divorce statute automatically revoked the policy’s designation of Melin as primary beneficiary, leaving Sveen’s children to take the proceeds. Melin, on the other hand, asserted that she should receive the proceeds based on the argument that the retroactive application of the Minnesota statute violated the Contracts Clause of the Constitution, which “prohibits any state Law impairing the Obligation of Contracts.”
The U.S. District Court for the District of Minnesota granted summary judgment for the Sveen children and awarded them the insurance proceeds. The court reasoned that the beneficiary of a life insurance policy has no vested interest in the policy until the insured dies. Without a vested interest, Melin had no “protectable contractual relationship, and thus [there was] no impairment of contract.”
The U.S. Court of Appeals for the Eighth Circuit reversed and remanded. The Eighth Circuit was bound by its decision in Whirlpool Corp. v. Ritter, in which the court found that a similar revocation-on-divorce statute in Oklahoma violated the Contracts Clause when applied retroactively. The facts in Whirlpool were nearly identical to those in Sveen, and the Eighth Circuit found that in the Whirlpool case “[the policyholder] was entitled to expect that his wishes regarding the insurance proceeds, as ascertained pursuant to this then-existing law, would be effectuated.” The court found that the policyholder’s ability to opt out of the law by redesignating his now ex-wife as the beneficiary of the policy did not resolve the constitutional issue because the statute’s effect still “directly alter[ed]” expectations of the policyholder.
III. Circuit Split
The U.S. Supreme Court granted certiorari in Sveen to resolve a circuit split on the question presented. For more than 25 years, courts had disagreed about whether retroactive application of the UPC revocation-on-divorce provision and similar statutes to contracts made prior to enactment of the statutes violated the Contracts Clause.
When analyzing potential Contracts Clause violations, courts must consider several factors. First, the question is whether the law “operated as a substantial impairment of a contractual relationship.” Factors include “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.” If a court finds substantial impairment of a contractual relationship, the court must then decide whether the law was “drawn in an appropriate and reasonable way to advance a significant and legitimate public purpose.”
Several decisions finding the retroactive application of revocation-on-divorce statutes to be in violation of the Contracts Clause focus on the expectations of the policyholder. The decision in the Whirlpool case and the Eighth Circuit’s decision regarding Sveen are examples. Similarly, the Pennsylvania Supreme Court found that the state’s revocation-on-divorce statute as applied retroactively “operated as a substantial impairment of a contractual relationship” because “[s]election of a beneficiary is the entire point of a life insurance policy.” The Court then found that the public purpose served and the way in which the statute was drawn were not enough to overcome the “severe, virtually total” contractual impairment by the statute at issue.
On the other side of the debate, a few intertwined themes emerge. One common argument, advanced by the Minnesota District Court in Sveen, involves the issue of when the beneficiary’s contractual rights actually vest. The Ninth Circuit recently discussed the issue in a case, finding that an Arizona revocation-on-divorce statute as applied to the beneficiary designations of an individual retirement account (IRA) did not violate the Contracts Clause when applied retroactively. In that case, the court focused on the question of whether the former spouse possessed a contractual right with which the retroactive application of the statute would interfere. Answering in the negative, the court found that the crux of the IRA contract was the company’s obligation to pay the decedent’s designated beneficiary but that “the beneficiary designation itself was not a contractual term.” Because the beneficiary designation could be altered up until the decedent’s death, no third-party right to the IRA could vest until the decedent’s death. In turn, because the ex-spouse’s expectancy interest was extinguished upon divorce, the ex-spouse “never possessed a vested contractual right, [so] she suffered no contractual impairment.”
A second argument is that the beneficiary’s contractual rights cannot be impaired by the revocation-on-divorce statute because the beneficiary is not a party to the contract at issue. As one court put it, “[The beneficiaries] are merely third-party beneficiaries to the contract … . As such, [they] fail to satisfy the threshold requirement of a contract clause claim, namely that there is a contractual relationship.”
Other courts distinguish between contractual and donative transfer components of the underlying contract. In a Tenth Circuit case, the court cited a statement issued by the UPC Joint Editorial Board after the Whirlpool case was decided stating that the Whirlpool decision was “manifestly wrong.” The statement indicated that only the donative transfer component of the contract (the beneficiary designation) is affected by revocation-on-divorce statutes but that the contractual component (the requirement that the insurance company pay out the agreed-upon proceeds at the agreed-upon time) is “appropriately … protect[ed] against legislative interference.” According to the statement, the donative transfer component “raises no Contracts Clause issue” and “there is never a suggestion that the insurance company can escape paying the policy proceeds that are due under the contract.”
With this background in mind, we turn to the U.S. Supreme Court’s ruling in Sveen.
IV. Sveen v. Melin Majority Opinion
In an opinion written by Justice Elena Kagan, the U.S. Supreme Court ruled 8-1 that the Minnesota revocation-on-divorce statute did not violate the Contracts Clause as applied in the Sveen case. The Court ended its analysis after considering the first factor of the test for determining a Contracts Clause violation — whether the law “operated as a substantial impairment of a contractual relationship.” The Court found that the revocation-on-divorce statute at issue does not substantially impair pre-existing contractual relationships, based on the three factors to be considered in making this determination.
First, the Court found that the Minnesota revocation-on-divorce statute does not undermine the contractual relationship and, in fact, often does the opposite. The Court assumed that the majority of policyholders would not want an ex-spouse to benefit from life insurance proceeds, just as they would not want an ex-spouse to benefit under their wills. Accordingly, “the insured’s failure to change the beneficiary after a divorce is more likely the result of neglect than choice.” Although the Court admitted that the default rule established by the Minnesota revocation-on-divorce statute clearly affects the contract that was made prior to enactment of the statute, it also tends to “support, rather than impair, the contractual scheme.”
Second, the Court found that the Minnesota statute is unlikely to interfere with a party’s reasonable expectations because divorce courts have long had the power to make similar modifications to pre-existing contracts. Because of this broad authority to divide property and alter contractual relationships that exist prior to divorce, including beneficiary designations on life insurance policies, retirement accounts, and similar property, the policyholder has never had a guarantee that the contracts existing prior to divorce will remain unchanged after the event. Accordingly, a policyholder’s “reliance interests are next to nil.”
Third, and perhaps most important for the majority of the Court, the law does not prevent a party from safeguarding or reinstating his or her rights because the policyholder has the ability to undo the default rule with minor effort, simply by sending a letter to the insurance company reaffirming the beneficiary designation that was in place prior to divorce. In multiple cases over the past two centuries, the Supreme Court has held that laws imposing “such minimal paperwork burdens” do not violate the Contracts Clause, even when applied retroactively. The opinion compares the requirement in this case to those related to the recording of a deed or mortgage or to statutory notice.
Taking this comparison one step further, the Court pointed out that the consequence of failing to reaffirm one’s beneficiary designation is not nearly as harsh as forfeiting all rights to a particular piece of property. The insurance company is still required to pay out the policy proceeds, and the contingent beneficiary named on the policy — rather than the primary beneficiary (i.e., the ex-spouse) — becomes the recipient. Although acknowledging that “redirection of proceeds is not nothing,” the Court nonetheless found that, based on precedent, such redirection falls short of a Contracts Clause violation.
V. Justice Gorsuch’s Dissent
Although outnumbered 8-1, Justice Gorsuch made several points in his dissent that are worth discussing. First, he objected to the Court’s characterization of the retroactive application of revocation-on-divorce statutes as an insubstantial impairment to the policyholder’s contractual rights. As he and Melin put it, “the choice of beneficiary is the whole point” of a life insurance policy. As such, the fact that Minnesota’s revocation-on-divorce law acts to change the beneficiary designation presents about as substantial an impairment to the life insurance contract as one could imagine.
The dissent also pointed out a seeming paradox in the majority’s reasoning. The purpose of the revocation-on-divorce statute and others like it is to ensure that policyholders who forget to change their beneficiary designations when they get divorced are protected from their negligence; the assumption is that most policyholders do not pay enough attention to their beneficiary designations to ensure that they match the policyholders’ aims at any given time. At the same time, however, the Court assumes that policyholders do pay enough attention to their beneficiary designations to ensure that if they do want their ex-spouses to benefit from their policies, they reaffirm that designation in order to carry it forward. According to the dissent, “The statute cannot simultaneously be necessary because people are inattentive to the details of their insurance policies and constitutional because they are hyperaware of those same details.”
Justice Gorsuch also questioned the majority’s assumption that most policyholders would prefer the default rule put in place by the revocation-on-divorce statute. He listed various reasons a policyholder may prefer to maintain an ex-spouse as beneficiary of a policy, including “a sense of obligation, remorse, or continuing affection, or to help care for children of the marriage that remain in the ex-spouse’s custody.”
Finally, moving to the second part of the Contracts Clause test, the dissent looked to the reasonableness of the Minnesota statute, citing case law indicating that “a substantial impairment is unreasonable when an evident and more moderate course would serve [the state’s] purposes equally well.” Justice Gorsuch listed several alternatives that would have been less intrusive to the policyholder, such as (a) a requirement that divorce courts or divorce attorneys confirm parties’ beneficiary designations as part of the divorce process; (b) a requirement that insurance companies “notify policyholders of their right to change beneficiary designations”; or (c) a campaign in which the legislature itself informs policyholders of this right.
VI. Key Takeaways
For practitioners, including family law, elder law, and estate planning attorneys, the Sveen case highlights the importance of encouraging clients to review beneficiary designations whenever a major life event occurs. At least half the states have enacted revocation-on-divorce statutes in some form; the remainder have not. Whatever the default rule in a practitioner’s state, it is highly likely that at least some clients would not want that rule (or lack thereof) to affect their estate plans.
From a legislative and advocacy standpoint, the points made in the dissent are worth considering in discussions of the retroactive and prospective application of revocation-on-divorce statutes. For example, the UPC revocation-on-divorce provision and similar statutes rely on historic assumptions about policyholder preferences, but it is unclear whether any empirical evidence backs up these assumptions. It may be wise to gather additional data to objectively ascertain how divorcing spouses actually behave and what their preferences are.
Even if the general assumption about policyholder intent is correct, the Whirlpool court suggested that the preference to leave ex-spouses out “is certainly not a universal truth” and such statutes may be just as likely to “effectuate or frustrate [the policyholder’s] intent.” To ensure that all policyholders are well served, notice requirements such as those discussed in the dissent may make it more likely that the intent of each individual policyholder is honored. Notice requirements and revocation-on-divorce statutes are not necessarily mutually exclusive options; Virginia’s revocation-on-divorce statute, for example, includes a provision that requires divorce decrees to include language alerting the parties that beneficiary designations naming the ex-spouse may be automatically revoked.
Finally, it remains unclear whether the Contracts Clause would prohibit applying this type of law retroactively if the law were enacted after, rather than before, the parties divorced. With the exception of Stillman, most cases involving retroactive application of revocation-on-divorce statutes follow the same chronology: the policy is purchased, the statute is enacted, and the parties divorce. Based on the reasoning in Stillman and similar cases, it could be argued that because a beneficiary’s interests do not vest until the policyholder’s death, there would be no Contracts Clause violation even if the revocation-on-divorce statute were enacted after the policyholder’s divorce was final. The Supreme Court’s decision in Sveen does not follow that line of reasoning; therefore, it leaves this particular question unanswered.