October 9, 2018
By: Carole M. Bass
Reviewing your estate plan following a divorce (and even before the divorce is final) is essential. Earlier this summer, in Sveen et al. v. Melin, 584 U.S. _____ (2018), the U.S. Supreme Court provided a reminder of the importance of post-divorce estate planning. In Sveen, the Court upheld the retroactive application of Minnesota’s revocation-on-death statute, revoking the designation of the decedent’s ex-wife as the beneficiary of his life insurance policy where the decedent failed to file a new beneficiary designation form following the couple’s divorce.
Mark Sveen and Kaye Melin married in 1997 and divorced in 2007. During the marriage, Mark purchased a life insurance policy naming Kaye as the primary beneficiary and naming Mark’s children from a prior marriage as contingent beneficiaries. Mark died in 2011 without having revised his beneficiary designation form. The divorce decree made no mention of the policy. However, the governing law in Minnesota (where Mark and Kaye resided) at the time of the couple’s divorce provided that divorce automatically revokes a beneficiary designation made in favor of an individual’s former spouse (although at the time that Mark purchased the policy and completed the beneficiary form Minnesota law did not provide for such automatic revocation).
Following Mark’s death, both Kaye and Mark’s children made claims to the policy. Ultimately the Supreme Court ruled against Kaye and in favor of the children, retroactively applying the Minnesota revocation-on-divorce statute.
While the result in Sveen is the correct one in most cases (as most people are not seeking to benefit their former spouses) – the financial and emotional toll of litigating this case could have been avoided if Mark had simply signed and filed a new beneficiary form after his divorce.
There are also some instances where the ex-spouse is still intended to be the beneficiary of a life insurance policy and, in such cases, the automatic application of a revocation-on-death statute can be avoided by completing a new beneficiary designation post-divorce that names the ex-spouse as the beneficiary.
New York, like Minnesota, has a revocation-on-death statute, which is contained in Section 5-1.4 of the Estates Powers and Trusts Law (“EPTL”). The New York statute provides that unless otherwise provided by the express terms of a governing instrument, a divorce, judicial separation or annulment revokes any revocable “disposition or appointment of property made by a divorced individual to, or for the benefit of, the former spouse, including, but not limited to, a disposition or appointment by will, by security registration in beneficiary form (TOD), by beneficiary designation in a life insurance policy or (to the extent permitted by law) in a pension or retirement benefits plan, or by revocable trust, including a bank account in trust form . . .”
It is especially important for individuals to revisit the beneficiary designations on their retirement accounts following a divorce. With respect to plans governed by the federal Employee Retirement Income Security Act of 1974 (“ERISA”), including most defined contribution and defined benefit plans such as 401(k) plans, it is well established that state law revocation-on-death statutes are preempted by ERISA. See Egelhoff v. Egelhoff, 532 U.S. 141 (2001) (holding that state statute providing for automatic revocation of spouse as beneficiary upon divorce was preempted as applied to ERISA benefit plans).
While provisions in favor of a former spouse under a will or in a revocable trust are automatically revoked under EPTL §5-1.4 if there is a final decree of divorce, a judicial separation, or an annulment, revocation does not occur upon commencement of a divorce proceeding. Changes need to be effectuated by executing a new will or by amending or restating a revocable trust.
Even if the will is changed, a surviving spouse retains the right to claim the statutory elective share during the pendency of a divorce proceeding, unless he or she is otherwise disqualified as a surviving spouse under state law. If there is no will in place, it is important to sign one in order to avoid intestacy (where the spousal share is larger than the elective share) while a divorce is pending. As with the elective share, a surviving spouse is not automatically disqualified from inheriting under intestacy upon commencement of divorce proceedings.
People also must be cognizant of statutory automatic restraints imposed by New York law during a divorce case, which prohibit either party from changing beneficiary designations on life insurance policies, changing title of joint accounts, or taking certain other actions during the pendency of the proceeding without the written consent of the other party or an order of the court.
Significantly, even after a divorce is finalized, provisions in favor of the former spouse's relatives are not automatically revoked under EPTL §5-1.4. See, e.g., In re Estate of Lewis, 114 A.D.3d 203 (4th Dep't 2014) (holding that will provision nominating the father of the testator's ex-husband, as alternate executor and alternate beneficiary was not revoked under New York law by virtue of the divorce).
It is imperative that estate planning be addressed at the commencement of a divorce, and again when the divorce is finalized.