When is a Pay on Death Beneficiary Designation Invalid?
By Styskal, Wiese & Melchione
Many of our financial institution clients build long term relationships with their account holders, and that of course is a good thing. However, the death of a long time accountholder, especially where old signature cards/ account records are involved and a divorce has occurred, can lead to some considerable confusion and competing family member claims.
Consider a typical scenario: Harry and Wilma got married in 1956, opened their savings and checking accounts with your FI in 1977. The signature cards for those accounts list Harry and Wilma as joint owners. Harry opens a series of IRA certificates from 1977 to 1990, all name Wilma as the Pay on Death (POD) Beneficiary. Harry and Wilma get a divorce in 1994. Harry dies in 2014, survived by Wilma.
Who gets what? Well, the account records say Wilma gets everything- she is joint owner on the savings and checking and POD on the IRA certificates. But let’s dig a little deeper.
Where a deposit account is “owned” by more than one person, California’s Multiple Party Account Law (Probate Code 5100 et seq) applies. Probate Code 5302(a) says that “sums remaining on deposit at the death of a party to a joint account belong to the surviving party … as against the estate unless there is clear and convincing evidence of a different intent.” So, absent some contradictory evidence, Wilma probably gets the money in the savings and checking accounts (Harry’s relatives may try to claim that the account funds are NOT community property funds given the time between the divorce and his death but they have to timely make that argument). The statutes create a presumption in favor of preserving the rights of a present co-owner. Makes sense, because Harry was likely receiving statements showing Wilma as a co-owner for 20 years after the divorce, and made no effort to change that. The burden is on Harry’s relatives to show a different intent.
The analysis with the funds in the IRA certificates is completely different, because of the single ownership nature of those accounts and Wilma’s status as a POD beneficiary rather than a co-owner. Probate Code Section 5302(b) says that upon the death of a sole party to a deposit account “any sums remaining on deposit belong to the POD payee … if surviving.” So, under the general statute governing PODs, Wilma gets the IRA money, even though they got divorced 20 years before Harry died? Hardly seems fair. Recognizing this incongruous result, the California Legislature amended the law in 2001, to add Probate Code 5601, which says that a “nonprobate transfer to the transferor’s former spouse … fails if, at the time of the transferor’s death, the former spouse is not the transferor’s surviving spouse ….” In other words, since Wilma was not Harry’s spouse as of the date of death the POD designation from 1977 to 1990 on the IRA certificates are nullified (unless Wilma can timely produce clear and convincing evidence of a contrary intent by Harry). Here, the law presumes that Harry probably forgot to remove Wilma as a POD beneficiary after their divorce (and it does not typically show up on a periodic statement). Here, the burden is on Wilma to show a different intent by Harry.
So, under California law, divorce generally invalidates POD beneficiary designations but NOT joint ownership status. When paying out deceased member’s funds it is very important to keep this distinction in mind. We suggest, prior to paying any deceased member’s funds where a divorce is involved, that your FI provide a general notice of the intended payout to all potentially interested parties to give them an opportunity to object, provide evidence of a different intent, etc.