The Supreme Court Has an IRA Reminder for You
By Sarah Brenner, JD
IRA Analyst
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In the recent case of Sveen v. Melin, the Supreme Court ruled that life insurance proceeds would not go to an ex-spouse, even though her name remained on the beneficiary form after the divorce. Instead, the Court said the Minnesota state statute removing an ex-spouse as a beneficiary upon divorce is constitutional and awarded the life insurance proceeds to the contingent beneficiaries; children from a prior marriage. This is a life insurance case, but also serves as an important reminder for you about your IRA.
Who Gets the Life Insurance?
In 2002, Minnesota adopted a state law that removes an ex-spouse from a beneficiary designation upon divorce. In 1997, Mark Sveen and Kaye Melin got married. The next year, Mark purchased a life insurance policy. He named Kaye as the primary beneficiary and his two children from a prior marriage as the contingent beneficiaries. Mark and Kaye got divorced in 2007. Mark never took any action to update or change the beneficiary on the life insurance policy. He died in 2011 and at the time of his death his ex-wife, Kaye, remained as the primary beneficiary.
After Mark’s death, his children from his prior marriage made a claim for his life insurance proceeds. They argued that the Minnesota statute revoked the designation of Kaye as the life insurance beneficiary when she and Mark divorced and that the proceeds should instead be paid to them as contingent beneficiaries. Kaye argued that she was entitled to the funds because the statute was not enacted until 2002 and Mark purchased his life insurance policies in 1998. She argued that to apply the statute when it did not exist in 1998 would be unconstitutional.
The battle over life insurance proceeds between Kaye and her former step children began in the District Court, went to the 8th Circuit Court of Appeals, and ended up in the Supreme Court.
The Supreme Court held that the Minnesota statute revoking the ex-spouse as the beneficiary of the life insurance upon divorce was constitutional and that therefore the insurance proceeds should be paid to the contingent beneficiaries, the children.
What This Ruling Means for Your IRA
What does this Supreme Court ruling mean for you? Well, Minnesota is not alone in enacting a statute which revokes beneficiary designations upon divorce for all sorts of assets. Currently there are 26 states that have such laws on the books. In Sveen, the law impacted a life insurance policy, but these laws can also affect your IRA.
The bottom line is that the Supreme Court has just given IRA owners yet another a reminder of how important it is to update a beneficiary designation. In Sveen, the beneficiary form was not updated after a divorce to remove the ex-spouse. In this case, state law removed the spouse as the beneficiary and the US Supreme Court agreed this passed Constitutional muster. The children got the money. A happy ending? Maybe, but this could all have been avoided by simply updating the beneficiary form after the divorce.