19-Feb-19
Revocation of Governing Instrument on Divorce
Take-Away: Another court decision was recently reported that found the divorce of an insured revoked the designation of a former spouse as primary beneficiary of a life insurance policy. The Alabama Supreme Court found that this was the case even though the state’s revocation-on-divorce statute was passed after the life insurance policy and beneficiary designation was in place. To reach this result the Court had to find that the Alabama statute did not violate that state’s Constitution ‘contracts clause’ which prevents states from passing statutes that impair existing contracts and address a common law marriage claim- yes, we still get to worry about common law marriages, even today.
Background: Like Michigan, Alabama, has a statute that automatically removes a former spouse as the beneficiary of a Will or another governing instrument if the spouses have divorced. Michigan’s statutes are found MCL 700.2801, 700.2806 and 700.2807. But these revocation-on-divorce statutes are being challenged around the country on the basis that the state’s revocation-on-divorce statute violates the state and Federal constitutional provisions that prevent state statutes that impair existing contractual rights.
Alabama Case: Blalock v Sutphin and New York Life Insurance Co. (CV-17-900084) Alabama Supreme Court (October 26, 2018)
Facts: In 2011 Lloyd took out a $250,000 whole life insurance policy with New York Life. Kimberly and Lloyd were married in 2012. Lloyd then formally changed the primary beneficiary naming Kimberly and Crimson, his daughter, as the 50%-50% primary beneficiaries of the New York life insurance policy. Lloyd’s daughter was from a prior relationship, Crimson Jade- yep, only in Alabama would someone name their daughter Crimson; I’m surprised her middle name was not ‘Tide’, but I digress. Kimberly and Lloyd were divorced in February 2016. Their divorce judgment was silent as to Lloyd’s life insurance policy. Lloyd never changed the beneficiary designation. Lloyd died in December, 2016. Crimson then filed a claim with the state court that claimed that her father’s divorce revoked Kimberly as a designated beneficiary of the insurance policy, so that the entire $250,000 would be paid to Crimson.
Claims: Kimberly raised a couple of novel arguments in the trial court proceedings: (i) she and Lloyd had established a common law marriage even after their divorce, effectively reviving her beneficiary designation under the life insurance policy; (ii) the insurance policy was obtained while Lloyd lived in Tennessee where the revocation-on-divorce statute is/was not as broad as Alabama’s, and thus Alabama courts did not have subject matter jurisdiction over Crimson’s claims; and (iii) the effect of the Alabama revocation-on-divorce statute violated Kimberly’s contractual right as a beneficiary of the life insurance contract, since Alabama’s revocation-on-divorce statute was adopted after Kimberly had been named as the policy’s co-beneficiary.
Court Holding: The common law marriage argument was thrown out at the trial court level. Alabama repealed common law marriages beginning in 2017, but even more important the court found that there must be ‘clear and convincing evidence’ to support a claim of common law marriage, which Kimberly failed to meet (they lived together for two months after their divorce.) The subject-matter argument was also rejected and Alabama’s law was applied to the claim because Tennessee’s laws were contrary to a “fundamental Alabama public policy, as expressed in its revocation-on-divorce statute.” The constitutionality of the Alabama revocation-on-divorce statute was upheld, primarily due to a U.S. Supreme Court Sveen decision issued earlier in 2018, which was reported in one of my earlier missives.
Sveen v. Melin, 138 S.Ct. 1815 (2018): In this case the U.S. Supreme Court addressed a similar challenge to Minnesota’s revocation-on-divorce statute where it was claimed that the statute violated the federal Constitution’s Impairment of Contracts Clause. The Supreme Court found that Minnesota’s revocation-on-divorce statute did not violate the Constitution’s Contracts Clause for several reasons. “First, the statute is designed to reflect a policyholder’s intent—and so to support, rather than impair, the contractual scheme. Second, the law is unlikely to disturb policyholder expectations because an insured cannot reasonably rely on a beneficiary designation remaining in place after a divorce. And finally, the statute provides a mere default rule which the policyholder can undo by sending a change-of-beneficiary form to his insurer.” [138 S.Ct. at 1822.] The Alabama Court found it easy to rely on the Sveen decision because both the Minnesota revocation-on-divorce statute and Alabama’s are modeled after the same section of the Uniform Probate Code which 26 states, including Michigan, have adopted.
Conclusions:
Avoid Using the Default Statute: Obviously this type of litigation can be completely avoided if the owner of the life insurance policy would affirmatively change the beneficiary designation after the divorce is completed. That advice extends as well to IRAs, TOD and POD beneficiary designations, and any other contractual arrangement where a beneficiary designation is permitted, e.g. an LLC membership interest or partnership interest which can also be directly passed at death by a beneficiary designation.
Define Marriage: It is interesting to look at the common law marriage argument that was unsuccessfully raised by Kimberly in her effort to revive her position as a designated beneficiary of Lloyd’s life insurance policy. Probably a dozen or so states still recognize common law marriage to some degree, and to be expected, each state has its own rules or standards of proof for when a common law marriage exists. While Michigan no longer recognizes a common law marriage, a trust beneficiary may reside in a jurisdiction that still recognizes common law marriages. A common law marriage should be something that a trust instrument addresses in its definitions to eliminate an individual showing up to claim that he/she was a common law spouse of a trust beneficiary, which status entitles them to distributions from the trust as a contingent or potential beneficiary of the trust when the named beneficiary dies. Rather than put the trustee between a rock and hard place to determine if an individual meets the definition of ‘surviving spouse’ of a trust beneficiary, it would be better to define marriage as a ‘legal marriage where a marriage license is formally issued by a state, and not a common law marriage that may be permissible and recognized in any other jurisdiction.’