- The Problem
Carlos and Anna get divorced after ten years of marriage. Their divorce settlement divides their property. Two years later Anna dies with a will that leaves her estate to Carlos. Her pension plan and insurance policy name Carlos as the primary beneficiary. She may even have a revocable trust naming Carlos as a beneficiary. Although she should have executed a new will, amended the trust and changed the beneficiary designations, she procrastinated. It seems likely that Anna would not want Carlos to inherit her property.
- Revocation of Will Provisions on Divorce
A. Policy. Unlike statutes that revoke a will based on changed circumstances that create obligations, like marriage or the birth of children, the revocation on divorce statutes take effect following a change in circumstances that removes an obligation. The underlying policy is presumed testamentary intent. A divorced decedent would likely not want his or her ex-spouse to inherit under a will executed before the divorce. Statutory law steps in to fix the problem for the decedent who forgot to execute a new will.
B. Statutory solutions. By statute or caselaw most states revoke Anna’s testamentary bequest to Carlos. States vary in what is revoked. Some states revoke only bequests to the ex-spouse. UPC 2-508 (the pre-1990 UPC) revokes any disposition or appointment of property made by the will, any general or special power of appointment, and any nomination of the ex-spouse as a fiduciary.
1. Stepchildren and other non-relatives. Statutes based on UPC 2-508 do not revoke will provisions that name persons related to the ex-spouse who, after the divorce, are not related to the decedent. Cases in many states have considered wills in which the beneficiaries in line to take after the ex-spouse are stepchildren of the decedent. Most courts have followed the statute, revoked the provision for the ex-spouse, and given the estate to the named stepchildren. In California and Tennessee courts have revoked bequests to the ex-spouse’s children, despite statutes that refer only to provisions for the ex-spouse.
In Texas, Missouri and Oklahoma courts have revoked secondary bequests , stating in each case that the bequest was contingent on the named person (the ex-spouse) not surviving. The ex-spouse did survive, so the contingency did not occur and the secondary beneficiaries could not take.
2. Presumed intent - not actual intent. In a 1995 New York case, a husband and wife had divorced so that the wife could avoid the husband’s creditors for medical expenses. When the husband died with a will executed before the divorce, his ex-wife could not inherit under the will.
- Nonprobate Transfers
A. The revolution. In 1984, John Langbein labeled the shift in the way property is transferred at death the “nonprobate revolution.” His article, and numerous articles published since then, make clear that probate has declined in importance while succession through nonprobate means has increased.
One set of laws governs wills; separate laws govern will substitutes. Commentators urge coordination of the laws and recognition that will substitutes are simply transfers at death without probate. Laws have developed piecemeal. The 1990 UPC extends revocation on divorce to will substitutes.
B. Nonprobate assets. Several categories of nonprobate assets exist: revocable inter vivos trusts, life insurance, pension accounts, joint accounts (bank, brokerage and POD accounts), and joint tenancies in real property.
1. Trusts, insurance and pensions. The first three categories operate like wills in that the owner controls the property during the owner’s lifetime and can change the ultimate disposition of the property at any time before death. At death the declaration of trust or beneficiary designation directs the disposition of the asset, just as a will names the beneficiaries who receive the testator’s probate property. The beneficiaries have no interests in the property other than expectancies until the owner’s death, and the owner can revoke a beneficiary’s right to take the property until death.
2. Joint bank accounts. Bank accounts are likely to be addressed during divorce. Further, failure to change a joint owner is less likely to be the result of forgetfulness. Presumed intent is more difficult here.
3. Joint tenancy in real property. Both joint tenants have a present property interest, and not merely an expectancy, in a joint tenancy in land. Tenancies by the entirety terminate automatically on divorce. Michigan and Ohio have statutes that convert joint tenancies to tenancies in common.
- Policy Behind Extending Revocation to Will Substitutes
Transferor’s intent. As with wills, the owner holds the right to revoke the naming of a beneficiary but the owner may not do it due to forgetfulness or procrastination. If the policy underlying the revocation of wills on divorce statutes is to effectuate the testator’s intent, the same policy suggests that revocation on divorce will also carry out the intent of transferors who transfer property at death through nonprobate means.
The transfer at death provisions of will substitutes make them functionally equivalent to wills. If that is so, then applying the same policy - decedent’s intent - to both wills and will substitutes makes sense. To date, courts have struggled with the issue. Increasingly, legislatures are stepping in.
- Caselaw
Most courts have refused to revoke beneficiary designations or trust provisions favoring ex-spouses. Courts treat the beneficiary designations as subject to contract law, and not wills law. Courts are waiting for legislatures to act.
A. Insurance
1. Contract law. Courts treat insurance as governed by the contract. If the owner did not comply with the contractual rules to change the beneficiary, then the named beneficiary receives the proceeds. Divorce does not affect the insurance policy. Courts have described this approach as applying presumed intent - the fact that the owner did not change the beneficiary designation indicates that the owner intended that the ex-spouse remain the beneficiary.
2. Property settlement agreement. A property settlement agreement executed in connection with a divorce may state the spouses’ intention that the agreement resolve all property issues between them and may further state that each spouse releases all claims to property held by the other. If the agreement gives an insurance policy to the insured spouse, then a question remains as to whether the agreement should be treated as revoking the designation of the now ex-spouse as beneficiary, if the insured spouse does not change the beneficiary.
Despite a property settlement on divorce that gave an insurance policy to the insured spouse, many courts continue to hold that the ex-spouse will still take the proceeds if the owner spouse does not change the beneficiary designation on the policy. The divorce settlement gave the owner control of the policy but did not affect the beneficiary designation. L.I. Bersch v. VanKeeck, 334 N.W.2d 114 (Wis. 1983).
A Washington case (under Washington’s prior statute) stated that the ex-spouse would be removed as beneficiary if the owner died within a year of the divorce. After a year, the court would assume that the owner intended that the ex-spouse remain as beneficiary. The decedent died more than one year after the divorce, so the ex-spouse received the proceeds.
3. Presumptive revocation. A New Jersey court said it makes sense to treat life insurance like wills and revoke a beneficiary designation for an ex-spouse. The revocation is presumptive, and the ex-spouse can overcome the presumption showing evidence of intent. Vasconi v. Guardian Life Ins. Co. of America, 590 A.2d 1161 (N.J. 1991).
4. Leave it to the legislature. Courts have expressed dissatisfaction with decisions that probably frustrate the intentions of the decedent, but say that change is up to the legislature.
B. Revocable trusts. In two cases courts have revoked trust provisions naming an ex-spouse as beneficiary, under a statute that revokes will provisions on divorce. In Clymer vs. Mayo, 473 N.E.2d 1084 (Mass. 1985), the Massachusetts court revoked provisions in an unfunded revocable trust, stating that “the will and trust were integrally related components of a single testamentary scheme.” The Supreme Court of Oklahoma took a similar approach in revoking provisions for an ex-spouse’s in an insurance trust, into which the testator’s will poured the residue of the testator’s estate. “The will without the trust has no meaning or value to the decedent’s estate plan.” Miller v. First Nat. Bank & Trust Co., Okla, 637 P. 2d 75, 77 (1981).
- Statutory Solutions
Even before the promulgation of the 1990 UPC, several states expanded revocation by statute to include revocable inter vivos trusts, irrevocable inter vivos trusts, life insurance and/or retirement benefits.
A. UPC 2-804. The current UPC provision expands revocation to a broad range of nonprobate transfers. The Comment to the Section explains its intent “to unify the law of probate and nonprobate transfers.” The Comment calls the new section “the most comprehensive provision of its kind.” A number of states have already adopted a statute similar or identical to UPC 2-804. With adoption of this statute and the other statutes that expand revocation to nonprobate transfers, several issues have surfaced in the courts.
B. Retroactive Application. Courts in Ohio and Oklahoma have held that retroactive application of the revocation provision to a contract unconstitutionally impairs obligations of contracts. An insurance policy provides by contract the requirements to change the beneficiary designation under the policy. Absent statutory authority, courts applying contract law have long refused to revoke the designation of an ex-spouse. Now, under new statutes extending revocation to insurance and pension contracts, courts have held unconstitutional the application of the statute to insurance contracts entered into before the effective date of the statute. Aetna Life Ins. Co. v. Schilling, 616 N.E.,2d 893 (Ohio 1993), reh. den. 619 N.E.2d 701; Williams v. Old American Ins. Co., 882 P.2d 576 (Okla. 1994), reh. den., cert. den.
Arizona applied its statute retroactively. Matter of Estate of Dobert, 963 P.2d. 327 (1992). Colorado courts have gone both ways (allowing retroactive application and refusing to permit retroactive application).
C. Equal protection. A lawyer’s claim that no rational basis existed for treating a former spouse differently from other persons with respect to pre-divorce life insurance failed to impress an Arizona court. Matter of Estate of Dobert, 963 P.2d 327 (1992).
D. Foreign divorce. The statute did not revoke beneficiary designations naming the decedent’s ex-wife to receive insurance proceeds, because the divorce had occurred in Hong Kong. The statute only applies to divorces granted in Washington. Henley v. Henley, 974 P.2d 362 (Wash. 1999).
- Federal preemption under ERISA
A. ERISA. The biggest open question, currently before the Supreme Court, is whether a state statute can revoke the designation of an ex-spouse as a beneficiary of a pension plan subject to ERISA. ERISA’s preemption provision is broad: “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.”
B. UPC. UPC attempts to address the issue by recommending that the federal courts apply the UPC as a model of state law concepts as federal common law. The UPC also requires that any ex-spouse or relative of the ex-spouse who receives pension benefits as a result of federal preemption of the revocation statute pay back the amount of the payment to the person who would have been entitled had the revocation statute been effective. UPC 2-804(h)(2).
C. Oklahoma cases. Sever al cases have held that ERISA preempts the Oklahoma statute that revokes death benefits for an ex-spouse. Mounce v. Mounce, 921 F.Supp. 712 (N.D.Okla. 1996); Brewer v. Zaqrotny, 978 F.2d 1204 (C.A.10 (Okla.) 1992), cert. den. 113 S.Ct. 1418; Iron Workers Mid-south Pension Fund v. Stoll, 771 F.Supp. 781 (E.D.La. 1991); Metropolitan Life Ins. Co. v. Hanslip, 939 F.2d 904 (C.A.10 (Okla.) 1991).
D. Texas. Two cases have held that ERISA preempts the Texas statute. The statute could not be used to revoke the designation of an ex-spouse as beneficiary under a pension plan providing life insurance benefits. Manning v. Hayes, 212 F.3d 866 (C.A.5 (Tex.) 2000), petition for cert. filed; Weaver v. Keen, 2001 WL 25718 (Tex.App.Waco Jan 10, 2001 (No. 10-99-305-CV).
E. Egelhoff. In In re Estate of Egelhoff, 989 P. 2d 80 (Wash. 1999), cert. granted, 120 S.Ct. 2687 (2000), courts in Washington determined that ERISA did not preempt the state statute that revoked beneficiary designations in favor of the decedent’s ex-wife. The decedent’s estate, and not his ex-wife, was entitled to receive insurance proceeds and pension plan benefits. During arguments before the U.S. Supreme Court, Justice Stevens raised the issue of decedent’s presumed intent, “Don’t you think there is a reasonable probability here that the plan participant thought the money would not go to his divorced wife?” Justice Breyer added, “What about ordinary common sense?” Ordinarily, “people would prefer that their…share would go to their children rather than to their just-divorced wife.” A decision is expected in July 2001.