When the marriage is over, former spouses usually want their property to go somewhere else when they die. At least the revocation-on-divorce statute assumes this is so and renders transfers made to the other spouse null and void. The statute became effective in 2001, but it now looks like it may affect transfers made before then.
Under Prob C §5040 (former Prob C §5600), a nonprobate transfer to a former spouse in an instrument executed before or during the marriage is presumed revoked on the transferor’s death, unless there’s clear and convincing evidence that the transferor intended to preserve the nonprobate transfer to the former spouse. For example, this may include an IRA beneficiary designation. However, this rule doesn’t apply to a life insurance policy naming the former spouse as a beneficiary.
But what if the instrument effecting the transfer was executed before the effective date of the statute in 2001?
The Eighth Circuit recently held that retroactive application of a state’s revocation-on-divorce statute violates the Contracts Clause of the U.S. Constitution. See Metropolitan Life Ins. Co. v Melin (8th Cir 2017) 853 F3d 410, decided under a Minnesota statute that also applies to life insurance, following its own earlier decision in Whirlpool Corp. v Ritter (8th Cir 1991) 929 F3d 1318. But the MetLife decision noted that other courts have disagreed, citing Stillman v Teachers Ins. & Annuity Ass’n College Retirement Equities Fund (10th Cir 2003) 343 F3d 1311.
The Ninth Circuit has now weighed in on the side of the Tenth Circuit in a case involving an IRA beneficiary designation decided under Arizona’s revocation-on-divorce statute. Lazar v Kroncke (9th Cir, July 14, 2017, No. 15–15078) 2017 US App Lexis 12618.
Here’s what happened: Decedent established an IRA in 1992 and named Former Spouse as the IRA beneficiary. Arizona’s revocation-on-divorce statute was enacted in 1995. Decedent and Former Spouse divorced in 2008 while domiciled in Arizona. Before Decedent’s death in 2012, he neither removed nor reaffirmed Former Spouse as the IRA beneficiary. Decedent’s son, as administrator of his estate, made a demand on Brokerage for the IRA proceeds. Brokerage froze the IRA pending judicial resolution. Former Spouse filed an action in a California district court against Brokerage for breach of contract and against the estate for declaratory relief. The case was later moved to Arizona district court, which ruled in favor of the estate.
The court of appeals affirmed, citing the Stillman decision. The appellate decision concludes:
Decedent’s contract with [Brokerage] specified that [Brokerage] would pay his chosen beneficiary in the event of his death. The beneficiary designation itself was not a contractual term. The IRA specifically provided that the Decedent could alter his beneficiary designation at any time and for any reason, so no third-party rights to the IRA could vest until his death.
The court noted that Arizona law differs from California law, which provides for only a rebuttable presumption that a nonprobate transfer to a former spouse is revoked. Under Arizona law, the transferor must positively reaffirm a nonprobate transfer to a former spouse.
The U.S. Supreme Court is invited to resolve the long-standing split of authority between Whirlpool and Stillman. A petition for certiorari in MetLife was filed on June 1, 2017. In the meantime, the Ninth Circuit decision seems definitive and fairly persuasive.
For more on California’s revocation-on-divorce statute and similar provisions for revocation of testamentary dispositions in Prob C §6122, see CEB’s California Will Drafting §10.7B. Also check out CEB’s California Estate Planning §7.18.
Other CEBblog™ posts you may find interesting:
- Getting Out of the Pool: Special Needs Trust Planning After the Special Needs Trust Fairness Act
- Using Life Estates to Protect Property and Avoid Reassessment
- New Foreclosure Protection for Deceased Borrower’s Successor in Interest
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