Court Opinion

ID: 859221
Source: CourtListenerOpinion
Date Created: 2013-04-26 19:45:43.849404+00
Date Added: 2024-06-11T13:11:24.226580
License: Public Domain

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).

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¶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

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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

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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

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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.

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¶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

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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.

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