As a family law attorney, you know that property settlements often require more than a cursory examination of your client’s assets and those of his or her spouse. You also know that your CFL Designation for Divorce Practitioners gives you the advanced financial knowledge and skills to competently handle the most complex property settlement situations.

One thing, however, that you may not think about examining is the number of life insurance policies that both your client and his or her spouse have in effect and their respective beneficiary designations. Nevertheless, these insurance policies could pose future problems for your client depending on such beneficiary designations.

Such was the situation encountered by the United States Supreme Court earlier this year in the case of Sween, et al. v. Melin. A Minnesota couple, Mr. Sween and Ms. Melin, married in 1997. During the marriage, Sween bought a life insurance policy in which he named Melin as the primary beneficiary and his two children from his prior marriage as contingent beneficiaries. Sween and Melin divorced in 2007, but the divorce decree failed to mention this life insurance policy. Nor did Sween ever change its beneficiary designations. Sween died in 2011, at which point his children and Melin made competing claims for the life insurance proceeds.

The Issue

Minnesota has a statute, Section 524.2-804, providing that “the dissolution or annulment of a marriage revokes any revocable beneficiary designation made by an individual to the individual’s former spouse.” The legislature did not enact this statute, however, until 2016, well after the Sween/Melin divorce. Melin argued that it should not apply retroactively to the insurance policy in question because such application violates the Contracts Clause of the U.S. Constitution.

The District Court awarded the insurance proceeds to the Sween children, but the Eighth Circuit Court of Appeals reversed, agreeing with Melin that a “revocation-upon-divorce statute like [Minnesota’s] violates the Contracts Clause when applied retroactively.”

The SCOTUS Ruling

The Supreme Court reversed the Court of Appeals, stating as follows:

“The retroactive application of Minnesota’s statute does not violate the Contracts Clause. That Clause restricts the power of States to disrupt contractual arrangements, but it does not prohibit all laws affecting pre-existing contracts. … The two-step test for determining when such a law crosses the constitutional line first asks whether the state law has ‘operated as a substantial impairment of a contractual relationship.’ In answering that question, the Court has considered 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 such factors show a substantial impairment, the inquiry turns to whether the state law is drawn in an ‘appropriate’ and ‘reasonable’ way to advance ‘a significant and legitimate public purpose.’”

In this case, the Court held that Minnesota’s statute does not substantially impair pre-existing contractual arrangements for the following three reasons:

  1. It was designed to reflect a policyholder’s interest, not impair it.
  2. It does not disturb a policyholder’s expectations at the time (s)he contracts.
  3. It is merely a default rule which the policyholder can quickly and easily undo by simply changing the policy’s beneficiary designation.

For more information on how gaining your CFL Designation for Divorce Practitioners gives you the financial knowledge and skills you need to attract additional high-asset clients, plus other benefits of AACFL membership, please visit this page of our website.