Third party’s right to be beneficiary of IRA owned as community property

In the case of In re Estate of Kirkes, the Supreme Court of Arizona decided that a departed individual could designate more than 50 percent of an individual retirement account held as a community property asset to a third party, but only where the living spouse receives at least 50 percent of the worth of the estate and the distribution is not otherwise fraudulent or unjust.

Background

The decedent held the IRA in his name. He named his son from an earlier marriage as a beneficiary to receive 83 percent of the IRA. Under a previous designation, the decedent's widow was named as the sole beneficiary.

Procedural history

The widow filed a legal challenge to her husband's beneficiary designation in the superior court, seeking an order awarding her the entire account balance, or, in the alternative, an award increasing her share to the value of her community interest in the account.

Arizona is a community property state. The law presumes that all property acquired during a marriage belongs to the community. Community property laws create a form of co-ownership between spouses, with each spouse having an undivided half interest in community property. When one spouse dies, the community ceases to exist. The deceased spouse may dispose of one-half the value of the community property. The other half is retained by the surviving spouse.

The superior court ruled that the surviving spouse was entitled to 50 percent of the account. The court of appeals reversed, finding that the account was analogous to prior Arizona Supreme Court decisions determining that the owner may designate a third party as the beneficiary of the proceeds of a life insurance policy.

The Arizona Supreme Court's ruling

The Arizona Supreme Court observed that two different theories have been adopted by community property jurisdictions in the disposition of non-probate community property at death. Some states apply an item theory, which restricts the spouse's power to transfer major assets to one-half the value of each individual community property item. Other states apply the aggregate theory, which views the community property as a whole. The value of all assets is aggregated and then divided.

The Court noted that an Arizona statute applies the aggregate theory when dividing community property between the parties in divorce proceedings. The Court also referred to prior court decisions implicitly approving the aggregate theory in cases holding that a spouse may designate a third party as the beneficiary on a community-owned life insurance policy.

The Court saw no reason to fashion a rule that distinguished between retirement accounts and life insurance policies and treat them differently. The court noted that retirement accounts and life insurance have many similarities. Both can be used as important tools for financial and estate planning, both have certain tax benefits and special protections under debtor-creditor laws, and both are "fungible" assets (that is, they are interchangeable with other assets of the same type).

The Court applied the aggregate theory, determining that a spouse may name a non-spouse as a beneficiary of more than half of a community property IRA as long as the other spouse receives half of the overall community (both probate property held in the estate and non-probate assets held outside the estate) and there are no other circumstances making the designation unjust or fraudulent to the spouse's rights.

Spouses with questions regarding community property rights in retirement assets and other family law matters are urged to consult with a competent attorney, experienced in such matters for the protection of their legal rights.