Many see the law of estates and trusts as a sleepy and perhaps polite backwater in the otherwise contentious practice of law. Not so declares the U.S. Supreme Court: “All good trust – and – estate lawyers know that ‘[d]eath is not the end; there remains the litigation over the estate.'” (Ambrose Bierce (1911)). The case that prompted this observation was Sveen v. Melin, 584 US ___ (June 11, 2018). The Sveen court held that a recent Minnesota statute would operate to terminate a former spouse’s rights as the named beneficiary to a life insurance contract entered into by her former husband. The Minnesota statute provided that all beneficiary designations naming a spouse terminate upon an absolute divorce. Such a termination of beneficiary status would apply to a life insurance policy entered into before the effective date of the statute but where the death occurred after the effective date.
The federal question was whether this retroactive application of the statute would violate the U.S. Constitution’s Contracts Clause. That clause restricts the powers of states to disrupt contractual arrangements as a general proposition but permits existing contractual relationships to be changed by law by a subsequent state law provided the state law does not interfere with a party’s reasonable expectations under a contractual bargain and does not prevent the party from safeguarding or reinstating those rights.
Maryland does not have such a global statute. There are, however, provisions that cause termination of status in very specific situations. Md. Code Ann., Estates & Trusts (“E&T”) § 4-105 holds that all provisions in a Will relating to the spouse shall be revoked upon an absolute divorce or annulment as long as the event occurs subsequent to the execution of the will. E&T § 14.5-604 likewise revokes all distributions from a trust to or for the benefit of a former spouse and removes such spouse as trustee or advisor as of the date of the divorce or annulment. Similarly, upon divorce, E&T § 17-112 removes a former spouse as agent under a power of attorney. These revocations/removals are not universal and do not affect other beneficiary designations.
Under Maryland law, there is no statute that automatically revokes a beneficiary designation naming a spouse upon divorce or annulment. PaineWebber Inc. v. East, 363 Md. 408 (2001). In PaineWebber, the Court of Appeals determined that a separation agreement that becomes incorporated into the divorce decree did not trigger revocation of the former spouse’s status as a beneficiary. This was because the language of the separation agreement only permitted the former spouses to change the designations upon divorce. That separation agreement was held not to have, by itself, effectuated the change. Because Maryland does not have a global revocation statute applying to all beneficiary designations, lawyers must review all designations upon a client’s divorce to avoid unintended consequences.
The Sveen decision means that if Maryland adopts a statute like Minnesota’s, it will disrupt beneficiary designations made prior to the enactment of the statute (if the statute is made retroactive). The Maryland Trust Act, of course, does have such a retroactive impact, which per this new ruling does not offend the Contracts Clause.