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9th Circuit Says Divorce Revocation Statutes Work

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Posted on Jul 31, 2017 | Share this post: Like Us on Facebook Join Us on Google Follow Us on Twitter

Divorced or divorcing?  Be sure to change your beneficiary designations.

If that sounds familiar, you must be a loyal reader.  Just a few months ago, we noted that there was a court decision that could call into question the effectiveness of state “revocation on divorce,” or ROD, statutes.  Such laws automatically revoke beneficiary designations naming a spouse after a marriage is terminated, and the decision, out of the 8th Circuit Court of Appeals, said such laws are sometimes unconstitutional because they run afoul of the Contracts Clause of the U.S. Constitution, which prevents state laws from “impairing the Obligation of Contracts.”

This month, the 9th Circuit, which includes Arizona, came to a different conclusion in Lazar v. Kroncke.  The facts in the case are similar to the one in the 8th Circuit:  The Mister (George Kroncke) established an IRA in 1992 and named his then-wife (Carolyn) as beneficiary; the pair divorced in 2008 when they lived in Arizona, and George failed to change the beneficiary designation.  After George died in 2012, his son Mark claimed the IRA, citing the revocation on divorce statute, and the IRA custodian, Charles Schwab, froze the account until a court could decide.

The 9th Circuit agreed with a 10th Circuit decision (Stillman v. Teachers Ins. & Annuity Ass’n Coll. Ret. Equities Fund, which dealt with an annuity beneficiary) and ruled that IRAs have two components: one that is contractual and one that is donative.  The contractual part was between the owner and the IRA custodian – investments, payments, etc., between the owner and the custodian.  That part, the contract part, wasn’t affected by the ROD statute and therefore was not unconstitutional.  The donative component – naming the beneficiary – wasn’t in itself contractual and therefore statutes like ROD that affect only the donative component do not violate the contracts clause.   Furthermore, the custodian did not have a contractual relationship with the beneficiary – the beneficiary right was only that of a third party and that right only existed at the owner’s death.  And in this case, by George’s death, Arizona law had already removed Carolyn.

Now we have what’s known as a “Circuit Split,” where courts of appeals arrive at different results, which of course can cause a lot of confusion.  Ideally, the split is eventually resolved by the U.S. Supreme Court, but it’s unclear whether any of these decisions will be appealed.

Another interesting part of the decision:  the court found that the IRA’s “choice of law” provision was not enforceable because Arizona’s public policy purpose for the law was more important.  “Choice of law’ provisions are the part of a contract, usually in the fine print, that says which state’s laws govern —- often not your own.  (In this case, it was California.)  The public policy for the law is to “achiev[e] the social goal of implementing [a person’s] probable intention in the wake of a divorce,” the Court noted, quoting the Arizona Court of Appeals in In re Estate of Dobert (1998).  The Court continued: “Arizona’s interest in its ROD statute is not merely to effectuate a donor’s probable intent, but also to provide clarity and avoid litigation.”  Arizona law, then, should trump any other named in a contract involving ROD statutes.

But, even though the relevant courts are on your side and not your ex’s, it’s better to make your intentions clear.  Change your designations and then check every so often to be sure your custodian has it right.  Mistakes happen.