New Ruling is Another Reason to Update Beneficiary Designations
Written by Jacque Mingle
Divorced or divorcing? If you needed another reason to update your beneficiary designations, here’s one:
Metropolitan Life Ins. Co. v. Melin, decided this month by the Eighth Circuit Court of Appeals, upheld a beneficiary designation favoring an ex-spouse.
This comes after a 2009 Supreme Court ruling (Kennedy v. Plan Administrator for DuPont Savings and Investment Plan) that said state revocation laws do not affect employer plans governed by the Employee Retirement Income Security Act (ERISA) because federal law preempts them. ERISA applies not only to qualified retirement plans, but also life insurance provided by an employer.
In the current case, the decedent, a resident of Minnesota, bought a life insurance policy, and in 1997 named his new wife as primary beneficiary and his children from a prior marriage as contingent beneficiaries. This was not an employer provided policy, so the Kennedy case did not apply. However, the court still ultimately ruled for the ex-spouse.
The couple divorced in 2007, and he didn’t change the designations. After his death in 2011, his children tried to claim the proceeds, relying on the state’s “revocation on divorce” statute. Such statutes say that divorce revokes benefits provided to the now-divorced-spouse. Statutes frequently not only include wills, but arrangements like rights of survivorship or beneficiary designations. The specific items changed depend on the specific state statute. In Minnesota, life insurance beneficiary designations were only added to this list in 2002 – well after the beneficiary form was signed.
The insurance company wasn’t sure who was the proper recipient of the funds, so it filed an “interpleader” action asking the court to provide instructions. Both the ex-wife and kids made arguments claiming the policy proceeds.
The lower court sided with the kids, but the Court of Appeals found for the ex-wife. The reason is the “Contract Clause” of the U.S. Constitution, which prevents state laws from “impairing the Obligation of Contracts.” The Court said the Minnesota law violated the Contract Clause when applied retroactively because, at the time the beneficiary form was signed, the expectation of the policyholder was that his designations would be honored unless changed – no revocation law that applied to a life insurance beneficiary designation existed at that time. Quoting an earlier 8th Circuit case, the Court said, the policyholder had a right to “rely on the law governing insurance contracts as it existed when the contracts were made.” The policyholder should be able to rely on laws at the time of the contract; “an individual could . . . neither know nor expect that the rules governing his policy have changed and thus might fail to consider the need to investigate potential changes in the law.”
Of course, consider whether most people would sign a beneficiary designation with an understanding of arcane statutes, as opposed to those who would clearly want a spouse eliminated as a beneficiary upon divorce.
The life insurance ruling being in the 8th Circuit means that Arizona courts are not bound by the reasoning. Yet the same reasoning could be argued here.
Arizona’s “revocation on divorce” statute, A.R.S. § 14-2804, is similar to Minnesota’s but not identical. It took effect on January 1, 1995, much earlier than Minnesota’s. As a result, fewer Arizona policies would be affected by a similar ruling in an Arizona court. Yet even though you live in Arizona and got divorced in Arizona, Arizona law might not govern your policy. The policy can dictate governing law, which could further complicate the effect of the statute.
The bottom line: you don’t want your estate to be caught up in one of these battles. Play it safe and update your beneficiary designations. Keep a record of the submission to the insurance company, and check annually to be sure that the company’s records are accurate.