Disposition of Community Property in a Last Will and Testament
Under Arizona law, each spouse has a one-half share in the couple’s community property. One spouse cannot dispose of more than their share when they die. But does that rule apply on an item by item basis, or in the aggregate? Can one spouse leave a third party more than a 50% interest in any single community property asset? This was the issue facing the Arizona Supreme Court in the case of In re Estate of Kirkes, 295 P.3d 432 (2013).
Facts of the Case
Mr. Kirkes and Mrs. Kirkes owned an individual retirement account as a community property asset. It was in Husband’s name and Wife was for years the sole beneficiary. However, before his death, the husband designated his son from a prior marriage, as an 83 percent beneficiary of the IRA.
Wife challenged the beneficiary designation. She asked the court to award her the entire account or, if not, to award her a full 50% of the asset. The court awarded Mrs. Kirkes 50% of the IRA. The Court of Appeals reversed.
The Arizona Supreme Court granted the petition for review.
Item Theory v Aggregate Theory
During the marriage, each spouse has an undivided half interest in community property. When one spouse dies, he or she may only dispose of his or her half interest in the community property. The remaining half interest belongs to the surviving spouse.
Some community property states apply this 50/50 division to every major asset. In these jurisdictions, the surviving spouse has a 50% interest in every major community asset. These are called “item theory” jurisdictions. In these states, a spouse can only bequeath 50% of any community IRA to a third party. This rule applies in item theory jurisdictions regardless of the existence of other estate assets to equalize the total distribution.
Other jurisdictions view the community property as a whole. These “aggregate theory” jurisdictions give the surviving spouse 50% of the community property estate. But he or she does not necessarily get 50% of each major asset.
Arizona Uses the Aggregate Theory
The Arizona Legislature adopted the aggregate theory for dividing up community property in a divorce. This Court allowed a life insurance policy owner to designate a non-spouse beneficiary, implicitly affirming the aggregate theory. But no Arizona law specifically addresses the issue raised here. However, an Arizona court approved the designation of a third-party beneficiary for a community-property life insurance policy. That was the case of Gaethje v. Gaethje, 441 P.2d 579, 584 (1968).
The Gaethje court upheld the designation because the surviving wife received at least half the total community property. Mrs. Kirke urges the court that retirement accounts are unique and different from life insurance proceeds. But the Court refused to apply a different rule to IRAs. It said that both insurance policies and IRAs are fungible assets so they should be treated similarly.
Husband’s Disposition of IRA Not Unjust
Wife does not allege unique circumstances making husband’s disposition of the IRA unjust. She has not claimed fraud. Nor does she claim that she will receive less than her full community share if husband’s beneficiary designation is honored.
The Court upheld the designation. It ruled that one spouse may designate a non-spouse beneficiary for more than 50 percent of a community property IRA. The courts will uphold this as long as the other spouse receives 50% of the overall community property. It may be struck down if other circumstances make the distribution fraudulent or unjust.
The Arizona Supreme Court affirmed the court of appeals’ opinion and reversed the superior court’s order. It ordered the IRA to be distributed in accordance with the beneficiary designation.