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DEATH OF SPOUSE DURING DIVORCE ACTION
1998 National Legal Research Group, Inc.

KANSAS: Wear v. Mizell, ___ Kan. ___, 946 P.2d 1363 (1997).

The husband had no equitable claim to the proceeds of life insurance policies owned by his wife, who died during the parties' divorce proceedings shortly after changing the designated beneficiary from the husband to her parents.

COLORADO: In re Estate of Westfall, 942 P.2d 1227 (Colo. Ct. App. 1996) (released 1997).

The wife's designation of her brother as the beneficiary on solely owned accounts to which she transferred jointly held marital funds after filing a dissolution action was not a transfer or encumbrance prohibited by the automatic stay provisions of the state equitable distribution statute.

What happens when a spouse dies before a final decree after having changed the beneficiary of a life insurance policy or bank account?

The Kansas Supreme Court held in Wear v. Mizell that a spouse may change the beneficiary of a life insurance policy unless a restraining order has been entered that precludes a beneficiary change. Without such a restraining order, the surviving spouse has no equitable claim to the proceeds that become payable when the other spouse dies during the divorce action, the court decided after reviewing case law from other jurisdictions.

Approximately 10 days after filing for divorce, the wife changed the beneficiaries of two insurance policies on her life from her husband to her parents, even though the premiums for one of the policies were being paid by automatic withdrawals from a joint checking account. The husband and wife subsequently discussed reconciliation, and planned a camping trip with their children for the wife's birthday, but the day before the camping trip, less than three months after filing the petition for divorce, the wife was fatally injured in a car accident.

The proceeds of the life insurance policies were paid to the wife's parents, and this lawsuit followed. Viewing the case as governed by the law of intestate succession and contract rather than by principles of equity, the trial court held that the parents were entitled to the proceeds since they were the named beneficiaries and since no restriction had been entered in the divorce action which would prevent the wife from changing the beneficiaries.

On appeal, the husband first argued that he and the wife had a tacit understanding that they would maintain life insurance on their own lives to protect each other. The Kansas Supreme Court held, however, that this "tacit understanding" did not amount to a contract so as to give the husband a vested interest in his status as beneficiary of the policies. The court discussed and distinguished Holloway v. Selvidge, 219 Kan. 345, 548 P.2d 835 (1976), which held that a deceased husband's estate, rather than his former wife, was entitled to the proceeds of his life insurance, where the former wife relinquished her inchoate rights in the proceeds in their property settlement agreement and the husband had tried without success to change the beneficiary before he died.

Next, the court considered the effect of a Kansas domestic relations statute, Kan. Stat. Ann. 23-201(b), which provides that all property owned by married persons becomes marital property at the time of commencement of a divorce action. Here, the court decided, the life insurance policies and the right to receive the insurance proceeds upon the death of the insured were marital property within the meaning of that statute, because the policies were obtained during the marriage and because income earned during the marriage was used to pay the premiums for one of the policies. The court noted, however, that under the statute the ownership interest created in marital property is only for the purpose of property division. That ownership interest did not give the husband an equitable claim in the life insurance proceeds because the wife died before any decree or other order concerning the marital property was entered in the divorce action. A divorce action is purely personal and abates at the time of death, the court explained.

On the question of whether a spouse may change beneficiaries in a pending divorce action, the court reviewed case law and authorities from other jurisdictions and found that the cases which have voided beneficiary changes in pending divorce actions appear to rely, at least in part, on the fact that the attempted change violated an existing order prohibiting such a change. When a change of beneficiary is made before a temporary restraining order in a divorce action goes into effect, the change has been upheld, the court said, citing Edinburg v. Massachusetts Mutual Life Insurance Co., 22 Mass. App. Ct. 923, 492 N.E.2d 1182 (1986). The court said that it had found no cases from other jurisdictions in which a beneficiary designation made during a pending divorce action was held void without there having been a restraining order in effect.

The court said that rather than relying on a general restraining order to prevent a change of beneficiary, "the better practice is to specifically reference a prohibition against a beneficiary change in a marital property restraining order." Wear v. Mizell, 946 P.2d at 1368. The court said that the following cases include examples of restraining orders containing express provisions concerning life insurance policies: Travelers Insurance Co. v. Daniels, 667 F.2d 572 (7th Cir. 1981); Candler v. Donaldson, 272 F.2d 374 (6th Cir. 1959); Standard Insurance Co. v. Schwalbe, 110 Wash. 2d 520, 755 P.2d 802 (1988).

What does the court's ruling mean as a practical matter? For one thing, a client who owns a life insurance policy and who wants to remove his or her spouse as beneficiary should do so before the entry of any restraining order. Conversely, a client who is the designated beneficiary of a policy on the other spouse's life should seek a temporary restraining order that expressly precludes a change of beneficiary during the pendency of the proceedings.

The existence of a restraining order imposed as a matter of law by a Colorado statute did not help the husband in In re Estate of Westfall establish a right to marital funds that the wife had transferred from joint accounts to solely owned accounts before her death during the dissolution action.

Just a week before filing the dissolution action, the wife transferred $6,000 held in a joint account with the husband to two new accounts ("pre-filing accounts") in her name alone, and she named her brother as the person to whom the accounts were to be paid in the event of her death (POD beneficiary). Two months after filing the dissolution action, she removed the husband's name from two other joint accounts ("post-filing accounts") and again designated her brother as the POD beneficiary.

While the dissolution action was still pending, the wife committed suicide. Both the husband and the brother claimed ownership of all of the accounts. In a probate proceeding, the brother was awarded the pre-filing accounts as the designated POD beneficiary, but the husband was awarded the post-filing accounts as the personal representative of the wife's estate. Both the husband and the brother appealed.

Pre-filing Accounts. Regarding the pre-filing accounts, the Colorado Court of Appeals held that the husband was not entitled to the imposition of a constructive trust upon the funds in those accounts. Because the wife owned an undivided one-half interest in the joint account, she had an equal right to deplete the funds in it, to create the pre-filing accounts, and to designate a new POD beneficiary. Although the wife may have intended to deprive the husband of his inheritance rights in these funds, that intent alone would not show that the transfer was fraudulent, the court said. Post-filing Accounts. Regarding the post-filing accounts, the appeals court held that the state property division statute did not bar the wife from removing the husband's name from the accounts and designating her brother as the POD beneficiary. Therefore, the court decided, the post-filing accounts belonged to the brother. The court noted that the husband and the brother had stipulated that the wife knew that her conduct in changing the accounts from joint accounts to single-party accounts in her name alone would not affect the dissolution court's authority to treat those accounts as part of the marital estate. In fact, the stipulation stated that the wife's counsel in the dissolution proceedings would testify that the wife had agreed that all of the accounts were to be included in the marital estate. These facts showed that the wife had no fraudulent intent and that there existed no basis for imposing a constructive trust upon the accounts, the court said. The husband argued that the wife's actions violated the automatic stay provisions of Colo. Rev. Stat. 14-10-107, which restrains the parties to a dissolution action from "transferring, encumbering, concealing, or in any other way disposing of, without the consent of the other party or order of the court, any marital property." Although the mere change of names on the accounts did not diminish the marital estate, the addition of the brother's name as the POD beneficiary constituted a "transfer" or "encumbrance," he contended. Accordingly, he argued, the transfer was void and the funds should be considered a part of the probate estate.

The appeals court rejected his argument. The change of names on the accounts had no effect upon the husband's rights, the court said. Funds held in a bank account are part of the marital estate whether held in the single name of one party or in the joint names, it noted. Furthermore, either party to a joint account has the legal right to deplete it. Therefore, the mere change of names on the accounts gave the wife no greater control over the funds than she possessed before the change. But for the addition of the POD beneficiary to these accounts, the husband would have inherited them as the wife's sole heir, the court noted.

While the designation of the brother as the POD beneficiary affected the husband's rights as the wife's heir, it did not "encumber" any marital property, the court held. A state banking statute specifically provides that a POD beneficiary has no right to sums on deposit during the lifetime of any party, the court noted. Hence, if the wife had lived, the accounts in question would have been distributed between the husband and the wife without regard to the POD designation. The POD designation therefore had no effect upon the marital estate and was similar, instead, to the designation of a beneficiary on a life insurance policy. Such designations do not constitute a transfer or encumbrance of any marital property, the court observed, citing Gorman-English v. Estate of English, 849 P.2d 840 (Colo. Ct. App. 1992).

The appeals court concluded, consequently, that the brother was entitled to the proceeds on deposit in all the accounts.

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