Life insurance purchased during marriage in one party’s name is community property in a divorce. California is a community property state. That means that all property acquired during a marriage is presumed to be community property. Cal. Fam. Code § 760. Separate property, on the other hand, is property acquired before marriage, after separation, or property acquired by gift or inheritance during marriage. Cal Fam. Code §770. The character of property (whether separate or community) can be changed, however, through the legal doctrine of transmutation. Through a transfer or agreement, married people can change separate property to community property, community property to separate property, or the separate property of one spouse to the separate property of the other spouse. Cal. Fam. Code § 850. To do this, they must have a signed writing which expressly states that the ownership of the property is being changed. Cal. Fam. Code § 852.

In some states, financial contracts that designate former spouses as beneficiaries for “non-probate assets”—assets not distributed by will or under the jurisdiction of the probate court– are automatically revoked upon divorce. If the holder of the policy or account doesn’t act to change the beneficiary designation, the proceeds automatically go to the decedent’s estate. In other states, however, former spouses may remain beneficiaries of non-probate assets if the designation is not changed.

Generally, non-probate assets can include checking and savings accounts, qualified and non-qualified retirement plans, individual retirement accounts, private or group life insurance policies, annuities, mutual fund accounts, and certificates of deposit. Their disposition upon the death of the account holder is typically governed by state law, or by a combination of state and federal law. Currently, about 23 states, including California, have statutes requiring revocation of non-probate asset beneficiary designation upon divorce, meaning that upon divorce, ex-spouses are automatically removed as beneficiaries on such assets as a matter of law. However, in California, the law specifically excludes life insurance policies from automatic revocation.

In California, designating a former spouse as the beneficiary to a life insurance policy prior to or during marriage will stand, unless:

  • The property settlement or divorce decree specifically provides for a contrary result.
  • The policy holder changes the beneficiary designation.
  • An insurance contract nulls the beneficiary designation upon divorce.
  • The former spouse legally waives their interest in the policy.

It does not matter who owns the policy and who receives it in the divorce. The beneficiary designation remains intact unless changed in accordance with the law or the insurance contract.

Similarly, if an insurance policy is provided as an employee benefit under what is known as a “qualified benefit plan” and governed by federal law, the policy holder is required to physically change the beneficiary designation upon divorce, or the proceeds will go to the former spouse if they are named as the beneficiary.

It is important to note that intent has no bearing on beneficiary designations for life insurance policies. The courts will not seek evidence of contrary intent, such as a verbal promise by the policy holder. They will assume that if the policyholder wanted the beneficiary designation changed, they would have done so. Challengers to beneficiary designations have a very high standard of proof that is difficult to achieve.

In all cases, federal law preempts state law, meaning even if a state provides for automatic revocation, if federal law does not, that is the standard that will be applied in appropriate cases. In addition, if someone wrongfully receives the benefits paid from non-probate assets, they will be required to reimburse the entity that issued the payment or the legally entitled beneficiaries.

If a divorce litigant bequeathed their estate to their estranged spouse that spouse will still inherit the estate upon your client’s death, even though there is a pending divorce. The family law court loses its jurisdiction over the matter upon death of either party. See [Bevelle v. Bank of America], 80 Cal. App. 2d 333 (1947). Thus, if a matter has not been finalized with a Judgment and a spouse dies, then the parties are treated as if they are still married. Accordingly, it is imperative \ to take whatever action they can to protect their estate as soon as practically possible.

Pursuant to Family Code Section 2040, Automatic Temporary Restraining Orders (“ATROs”) are placed into effect upon the filing of a dissolution. The ATROs are essentially financial restraining orders that prevent a party from transferring, encumbering, hypothecating, concealing or in any way disposing of any real or personal property, irrespective of characterization, without the written consent of the other party or court order. If violated, a party can face a contempt action with the aggrieved party entitled to potential restitution and attorney’s fees. Pursuant to Family Code Section 233, the ATROs remain in effect the final judgment of dissolution is entered.

The ATROs restrain a party from modifying or amending a non-probate transfer in a manner that effects the disposition of property, without the written consent of the other party. A non-probate transfer is defined by Family Code Section 2040(d)(1) as an instrument other than a will that transfers property on death, including revocable living trusts, payable on death accounts, Totten trusts and similar items.

Further, pursuant to Family Code Section 2040(3), a party is allowed to eliminate a right of survivorship to property, with written notice. This subdivision was enacted after the ruling in [Estate of Mitchell],76 Cal. App. 4th 1378 (1999). Here the court ruled “when one spouse severs a joint tenancy with the other spouse by executing and recording a declaration of severance, there is neither a transfer nor a disposition of any property. Such a severance therefore does not violate an injunction order entered pursuant to Family Code, Section 2040.”

It is advisable to sever joint tenancy assets upon filing for divorce because prior to entry of Judgment, the right of survivorship is preserved, and the family court will have no power to apply California community property law to the property. The property could then pass in full to the surviving spouse.  However, if death occurs after a Judgment is entered terminating your marriage (declaring a legal separation), but before the court adjudicates a division of your marital property, joint tenancy property held by the parties will be divided equally, if the court finds it is community property, meaning the surviving spouse will take only a fifty percent interest and the deceased spouse’s 50% share will pass through his or her estate to the spouse’s heirs. See [Marriage of Hilke], 4 Cal. 4th 215 (1992).

The ATROs also have some other exceptions that allow a party to take other actions during the pendency of their divorce. Specifically, they allow: 1) creation, modification, or revocation of a will; and 2) revocation of a non-probate transfer, pursuant to the instrument with notice filed and served on the other party. Accordingly, a party may be able to amend or revoke a trust.  But is not able to change the disposition of the assets during the pendency of the matter, without the written consent of the other party.

[In the Estate of Khan], 168 Cal. App. 3d 270 (1985), the court found that the husband’s attempt to revoke a trust, without written consent, during the proceeding was an attempt to transmute property into his separate property. The court held that the husband could not act alone to revoke the trust because the revocation clauses in the trust utilized language requiring both parties. Consequently, it is important to look to the language of a revocable trust in determining whether it is advisable or possible to amend or revoke a trust. The trust language may state that both parties must consent to revocation or modification. As such, party may be forced to seek the court’s assistance if an unwilling litigation refuses to revoke a trust.

In addition, it is permissible for a party to a divorce to create a new revocable or irrevocable trust. This trust cannot be funded during the proceeding. Essentially, a party can revoke their old will and create a new “pour over” will during the proceeding. This will allow any assets to pour over into the unfunded trust upon death. However, if the party dies during the pendency of the proceeding, the assets will still need to go through the probate process. Although costly, at least the party will have his estate bequeathed to his desired beneficiaries, under the control of the party’s desired fiduciaries.

A party is also able to modify a durable power of attorney and a health cared directive, without notice or without written consent from the other party. This allows a party to change who can make their health care decisions and who can manage their financial estate, if they become incapacitated, but do not pass away during the pendency of the litigation. This also allows a party to choose who can represent their interests in the litigation, if they are not of sound mind to continue to do so. This step can avoid unnecessary motions for [guardians ad litem].

Under Family Code Section 721, the parties have fiduciary obligations to each other until the final judgment is entered. The statute provides that the parties have a confidential relationship which imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take an unfair advantage of the other.

Transfers made during an ongoing divorce and until entry of the final judgment must be done with the utmost care and notice to opposing party/counsel should always be provided. If there is no agreement, a court order should be sought. Any questions, you can email me at [email protected] or call my office at 310-601-7144.

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CategoryLegal Advice