In Re the Estate of Fred N. Kirkes ( 2013 )

SUPREME COURT OF ARIZONA
En Banc
In re the ) Arizona Supreme Court
ESTATE OF FRED N. KIRKES ) No. CV-12-0120-PR
)
) Court of Appeals
) Division Two
) No. 2 CA-CV 11-0072
)
) Pima County
) Superior Court
) No. PB20100346
)
) O P I N I O N
_________________________________ )
Appeal from the Superior Court in Pima County
The Honorable Charles V. Harrington, Judge
REVERSED
________________________________________________________________
Opinion of the Court of Appeals, Division Two
229 Ariz. 212, 273 P.3d 664 (2012)
AFFIRMED
________________________________________________________________
LAW OFFICE OF ETHAN STEELE, P.C. Tucson
By Ethan Steele
And
TIMOTHY A. OLCOTT, P.C. Green Valley
By Timothy A. Olcott
Attorneys for Gail J. Kirkes
WATERFALL, ECONOMIDIS, CALDWELL, HANSHAW,
& VILLAMANA, P.C. Tucson
By Jill D. Wiley
Attorneys for Joshua C. Kirkes
________________________________________________________________
B E R C H, Chief Justice
¶1 This case addresses whether a spouse, at death, can
leave more than one-half of a community-owned retirement account
to a non-spouse beneficiary. We conclude that, absent unusual
circumstances, the deceased spouse may, as long as the surviving
spouse receives at least one-half of the community’s value.
I. FACTS AND PROCEDURAL HISTORY
¶2 Fred Kirkes designated Joshua Kirkes, his son from a
prior marriage, as the beneficiary of 83 percent of a community-
owned individual retirement account (“IRA”). Gail Kirkes,
Fred’s wife at the time of his death, had previously been the
sole beneficiary on the account, which was held in Fred’s name.
She challenged the beneficiary designation, asking the superior
court to award her the entire account or, alternatively, to
increase her share based on her community interest.
¶3 Gail and Joshua filed cross-motions for summary
judgment. The superior court granted Gail’s motion, awarding
her 50 percent of the IRA. The court of appeals reversed.
Analogizing the account to life insurance proceeds, which this
Court has permitted the holder to leave to a third party, the
court remanded the case to the superior court to ensure an
equitable division of the community. In re Estate of Kirkes,
229 Ariz. 212, 215-16 ¶¶ 14, 18, 273 P.3d 664, 667-68 (App.
2012).
2
¶4 We granted Gail’s petition for review to address a
recurring issue of statewide importance. We have jurisdiction
under Article 6, Section 5(3) of the Arizona Constitution and
A.R.S. § 12-120.24.
II. DISCUSSION
¶5 During marriage, each spouse has an undivided half
interest in community property. Nat’l Union Fire Ins. Co. of
Pittsburgh, Pa. v. Greene, 195 Ariz. 105, 110 ¶ 20, 985 P.2d
590, 595 (App. 1999). Generally, either spouse has the power to
dispose of community property, see A.R.S. § 25-214(C), and each
spouse owes the other certain fiduciary duties, Gerow v. Covill,
192 Ariz. 9, 18 ¶ 40, 960 P.2d 55, 64 (App. 1998).
¶6 Community property jurisdictions are split on whether
the disposition of non-probate community property at death
should be viewed as a whole, or whether the community interest
should be divided based on the value of each major asset.
Compare Estate of Wilson v. Bowens, 227 Cal. Rptr. 794, 798
(Cal. Ct. App. 1986) (payable on death designation on community
bank account effective only as to a one-half interest), with
Byrd v. Lanahan, 783 P.2d 426, 429 (Nev. 1989) (designation
effective to the extent the surviving spouse receives half of
the overall community). Upon the death of one spouse, the
community dissolves, with half of the value of community assets
going to the surviving spouse and the other half passing subject
3
to disposition by the deceased spouse. Gaethje v. Gaethje, 7
Ariz. App. 544, 549, 441 P.2d 579, 584 (1968). States
restricting transfers of community property to a one-half
interest in individual assets are referred to as following an
“item theory,” while those applying the more flexible approach
follow an “aggregate theory.” See William A. Reppy, Jr.,
Application of the “Item Theory” to Fungible Community Property
Upon Death of Spouse Exercising Testamentary Power, 14 Com.
Prop. J. 1 (1987); see also Charles E. Zalesky, Comment, The
Modified Item Theory: An Alternative Method of Dividing
Community Property Upon the Death of a Spouse, 28 Idaho L. Rev.
1047 (1992).
¶7 The Arizona Legislature has adopted the aggregate
theory in allocating community property upon dissolution of
marriage. See A.R.S. § 25-318. And this Court has affirmed a
policy-owner’s right to designate a non-spouse beneficiary of a
life insurance policy, and, in doing so, implicitly approved of
the aggregate theory in the context of community-owned life
insurance. See Gristy v. Hudgens, 23 Ariz. 339, 347-48, 203
P. 569, 572 (1922), disapproved of on other grounds by Day v.
Clark, 36 Ariz. 353, 285 P. 682 (1930). But no Arizona statute
specifically addresses the issue here. Cf. A.R.S. § 14-3101(A)
(“Upon the death of a person, his separate property and his
share of community property devolves to the persons to whom the
4
property is devised by his last will, . . . or to those
indicated as substitutes for them in cases involving
renunciation or other circumstances affecting the devolution of
intestate estates.” (Emphasis added.)).
¶8 In Gristy, we considered the effect of designating a
third party beneficiary on a life insurance policy for which the
premiums may have been paid with community funds. 23 Ariz. at
348, 203 P. at 572. Upholding the designation, we noted there
had been “no showing or statement that such funds were paid in
fraud of the wife’s rights, and no showing that the wife had not
received even more than her share of the community property.”
Id.
¶9 Gail counters that we have applied an item theory in
two other cases, La Tourette v. La Tourette, 15 Ariz. 200, 137
P. 426 (1914), disapproved of by Mortensen v. Knight, 81 Ariz.
325, 331, 305 P.2d 463, 467 (1956), and In re Monaghan’s Estate,
65 Ariz. 9, 173 P.2d 107 (1946). We find these cases
inapposite. La Tourette merely noted that one spouse has an
interest in the community property before the other spouse’s
death and that, at death, a spouse may dispose only of his or
her interest in the community, 15 Ariz. at 207-09, 137 P. at
428-29, propositions with which we agree, but which do not
resolve the question here. In re Monaghan’s Estate held that a
surviving wife’s share of the community could not be sold to
5
satisfy probate expenses. 65 Ariz. at 22-23, 173 P.2d at 115.
Neither case adopts the item theory.
¶10 In contrast, on facts similar to those here, our court
of appeals has approved a father’s designation of his son from a
previous marriage as the beneficiary of a term life insurance
policy purchased with community assets. Gaethje, 7 Ariz. App.
at 549, 441 P.2d at 584. In Gaethje, the court relied on Gristy
to uphold the life insurance beneficiary designation because the
surviving wife received “at least as much in value as one[-]half
of all of the community and other jointly acquired property
(including therein the proceeds of the life insurance policy
here in question).” Id. That is, rather than looking at each
item of property, the court looked at the aggregate value of the
community property. Id.; see also In re Estate of Alarcon, 149
Ariz. 336, 339, 718 P.2d 989, 992 (1986) (describing Gaethje’s
consideration of value of all community property including
insurance proceeds as “[o]ne approach approved in Arizona”).
¶11 Because of the “unique nature” of retirement accounts,
Gail urges us to distinguish them from life insurance proceeds.
She argues primarily that retirement accounts are distinctive
financial planning devices that receive special creditor
protections and tax benefits, and therefore require special
protections for the surviving spouse.
6
¶12 We decline to apply a different rule to retirement
accounts. Although such accounts are useful devices for
retirement planning, life insurance may serve similar purposes.
We likewise find Gail’s tax-related arguments unconvincing
because life insurance proceeds also enjoy preferential tax
treatment. See, e.g., I.R.C. § 101(a)(1) (excluding certain
life insurance benefits from gross income); A.R.S. § 43-1001(2),
(11) (basing state-taxed income on federal adjusted gross
income). Much like retirement accounts, insurance proceeds are
generally protected from estate creditors, see A.R.S. § 20-1131,
and may receive ongoing creditor protections through estate
planning. Compare id. § 14-10502 (spendthrift trusts), with id.
§ 33-1126(B) (IRA creditor protections). Moreover, both are
fungible assets. For these reasons, any distinctions do not
warrant different treatment.
¶13 Joshua asserts that A.R.S. § 14-3916, which authorizes
the personal representative to “consider community property held
outside the estate so that the division of community property
held in the estate and outside the estate is based on equal
value but is not necessarily proportionate,” answers the
question here. But that section does not control for two
reasons. First, the disposition of the IRA does not involve the
personal representative. Second, Gail seeks only one-half of
the IRA account. She did not claim that she would receive less
7
than one–half of the community estate’s value if 83 percent of
the IRA went to Joshua. We do agree, though, that § 14-3916
supports the result we reach today by authorizing consideration
of the value of the entire estate, including both probate and
non-probate assets. See also A.R.S. § 14-1102(B)(2) (noting
underlying purpose of probate code to effectuate decedent’s
intent).
¶14 Although equitable considerations may occasionally
warrant a different outcome, Gail does not allege any unique
circumstances making Fred’s disposition of the IRA unjust. She
has not asserted fraud or claimed that she will receive less
than her full community share if the decedent’s beneficiary
designation is honored. We therefore hold that one spouse may
designate a non-spouse beneficiary of more than 50 percent of a
community property retirement account, as long as the other
spouse receives half of the community overall, and other
circumstances do not make the distribution fraudulent or unjust.
See, e.g., Finck v. Finck, 9 Ariz. App. 382, 388, 452 P.2d 709,
715 (1969) (“peculiar circumstances” warranted ensuring husband
maintained a one-half interest in community-owned stock after
divorce). The beneficiary designation here is effective.
III. CONCLUSION
¶15 For the foregoing reasons, we affirm the court of
appeals’ opinion and reverse the superior court’s order. The
8
IRA shall be distributed in accordance with the beneficiary
designation.
__________________________________
Rebecca White Berch, Chief Justice
CONCURRING:
__________________________________
Scott Bales, Vice Chief Justice
__________________________________
A. John Pelander, Justice
__________________________________
Robert M. Brutinel, Justice
__________________________________
Michael J. Brown, Judge*
* Pursuant to Article 6, Section 3 of the Arizona
Constitution, the Honorable Michael J. Brown, Judge of the Court
of Appeals, Division One, was designated to sit in this matter.
9