> Relying on state or federal laws to administer your estate is never advisable.
> Beneficiary designations supersede the provisions of a Will or Trust.
> By organizing your assets as a part of your estate planning, you can ensure that designations are correct and no assets or accounts are left behind.
Beneficiary designations can be utilized as an easy, efficient estate planning tool. However, too often they turn into an estate planning pitfall. Whether it is a result of bad advice, misunderstanding or simple oversight, naming the wrong beneficiary or failing to update a designation for a retirement account or life insurance policy is likely to have significant consequences.
An example of the consequences of failing to update a beneficiary designation made it all the way to the United States Supreme Court this summer (Sveen v. Melin, 584 U.S. ___ (2018)). While the decision focused largely on the constitutional question of whether applying a state statute that was enacted after the beneficiary designation had been made violates the “Contract Clause” (which prohibits states from passing laws that “impair the obligation of contracts”), it also reminds us of the importance of reviewing beneficiary designations regularly.
The facts of the case were as follows:
> In 1997, Mark A. Sveen and Kaye L. Melin were married and Mark purchased a life insurance policy that same year naming Kaye as the primary beneficiary and his two adult children from a previous marriage as the contingent beneficiaries.
> In 2002, Minnesota enacted a statute that provides 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).
> In 2007, Mark and Kaye divorced.
> In 2011, Mark died with the life insurance policy intact.
After the insurance company filed suit to determine whether the law applied to Mark’s beneficiary designation, both Kaye and Mark’s children filed their claims to the policy proceeds. Kaye testified that she and Mark had agreed to keep each other as the primary beneficiaries in their respective life insurance policies, but the matter was not addressed in their divorce agreement.
In an 8-1 decision, the Court held that the statute did not operate as “a substantial impairment of a contractual relationship” for the following reasons and thus was not in violation of the Contract Clause:
> First, the statute is designed to reflect a policyholder’s intent, citing laws that automatically revoke a Will upon divorce as a similar example.
> Second, the law is unlikely to disturb any policyholder’s expectations because it does no more than a divorce court could always have done and the insured cannot reasonably rely on a beneficiary designation remaining in place after a divorce.
> Third, the statute supplies a mere default rule, which the policyholder can undo in a moment by submitting an updated beneficiary designation.
Thus, the Court reversed the judgment of the Court of Appeals and ruled in favor of Mark’s children, remanding the case for further proceedings.
Utilizing Beneficiary Designations
The Sveen case teaches us some important lessons about utilizing beneficiary designations while avoiding the pitfalls. Illinois and several other states have similar statutes to the Minnesota law at issue in Sveen. However, relying on state law to administer your estate is likely to lead to significant unintended consequences, often including family conflict and litigation.
There are several possible scenarios of why Mark’s beneficiary designation was not updated following the divorce. While unlikely, it is possible that Mark intended to leave the life insurance policy to Kaye. If this was the case, he should have updated his beneficiary designation or left the policy to Kaye via bequest in an updated Revocable Living Trust. The more likely scenarios are that Mark was advised of the new law and decided to rely on it to revoke the pre-divorce beneficiary designation or that he forgot about the policy and who he had designated as the beneficiary. Regardless of the intention, his estate planning and beneficiary designations should have been revisited immediately upon the decision to divorce.
Because beneficiary designations supersede the provisions of a Will or Trust document, updating existing beneficiary designations is a crucial part of the estate planning process. While life insurance beneficiary decisions are often straightforward, choosing the right beneficiary for retirement accounts and updating the designation correctly involves significant income tax and asset protection considerations. By organizing your assets as a part of your estate planning, you can ensure that your beneficiary designations are correct and no assets or accounts are left behind.
Relying on state and federal laws to administer your estate is never advisable for the exact reasons demonstrated by the Sveen case. Certain estate planning may be affected by such a law while others are not. Additionally, some estate planning documents contain divorce clauses that treat a spouse as having predeceased the principal in the event of a divorce or legal separation. The best practice to ensure that your estate is administered in accordance with your wishes and that your loved ones can avoid unnecessary conflict and litigation is to revisit and update your estate planning documents as soon as possible in the event of a significant change to your family or financial situation.