Application of "spousal Consent Rules" to Community Property Individual Retirement Accounts

By Paul H. Miller^*

This article discusses the application to community property ("CP") Individual Retirement Accounts ("IRAs")¹ of sections 5000 through 5032 of division 5 of the California Probate Code, the division governing nonprobate transfers. I refer to these statutes as the "Spousal Consent Rules."² These statutes ensure that if the vested owner of a CP IRA exercises the right under federal law to transfer 100% of the IRA to the beneficiary that the owner specifies, the other spouse has the right to set aside the owner's transfer of 50% of the IRA and to transfer the value of that CP interest to different beneficiaries. The spouse may direct the disposition of a CP interest in an IRA, even though federal law does not allow a direct transfer of that interest from the IRA.³

A CP IRA is a nonprobate transfer to beneficiaries designated in the terms and conditions governing the IRA. It satisfies the definition of a nonprobate transfer in Probate Code section 5000, subdivision (b)(3): A transfer of assets under terms and conditions in a writing (the "instrument") that pass to a person whom the owner identifies either in the instrument or in a separate writing, including a will, executed either before or at the same time as the instrument, or later.⁴ In the case of an IRA, the written instrument referred to in section 5000(b) (3) is the written agreement governing the IRA.

The Spousal Consent Rules apply to IRAs and all other nonprobate transfer assets such as insurance policies, annuities, POD accounts, Totten trusts, and non-qualified retirement plans.⁵ This article only discusses the effect of the Spousal Consent Rules on beneficiary designations for IRAs for two reasons: (1) as of the end of the third quarter of 2019, $9.8 trillion was held in individual retirement accounts in the United States;⁶ and (2) individual retirement accounts are governed by federal law making the application of the Spousal Consent Rules more complicated than for other nonprobate transfers.⁷

Although it has been nearly 30 years since enactment of the Spousal Consent Rules, they are not well known. Only one court decision explains any of the rules⁸ and one comprehensive article.⁹ The author is not aware of a presentation explaining the Spousal Consent Rules given at any of the annual major continuing education estate planning and trust programs.¹⁰ If attorneys are unfamiliar with the Spousal Consent Rules, it follows that their clients are unfamiliar with them. If clients later become aware of errors in implementing their estate plan under these rules, they may hold their estate planning attorneys responsible. Hopefully, the information provided in this article may avoid this result.

The spouse who is not on title to a CP IRA has important decisions to make under the Spousal Consent Rules to designate his or her beneficiaries. Because these rules are complex, the spouse may need the assistance of an attorney to designate the IRA beneficiaries properly. Spouses designating their own beneficiaries can make mistakes with adverse consequences, particularly where the spouse who dies first is not the IRA owner. These mistakes can include: (1) unintended beneficiaries receiving IRA benefits; (2) probate of the value of the non-vested spouse's 50% of the CP IRA proceeds and its subsequent distribution under that spouse's will or by intestacy rather than in accordance with the IRA designation; and (3) expensive litigation between the non-vested spouse, estate, or estate beneficiaries on one side, and the spouse who is the vested owner of the IRA, estate, or the IRA beneficiaries on the other side.

What makes the Spousal Consent Rules difficult to understand is that the governing statutes refer to the spouse who is the vested owner of the CP IRA in five different ways¹¹ and the non-vested owner in seven different ways.¹² To make the discussion easier, this article uses the term "Owner" to refer to the spouse who is the vested IRA Owner and assumes the Owner is a female. This article uses the term "Spouse" when referring to the spouse who is not the vested Owner and assumes the Spouse is male. When referring to either spouse, but not in their capacity as the Owner or the Spouse, the terms "spouse" or "spouses" are not capitalized. In addition, this article makes the following assumptions: (1) when referring to an asset or assets as CP during the period beginning with the death of the first spouse to die, the article assumes that CP assets have not been allocated between the spouses; and (2) the effect of income taxes, estate taxes, attorney's fees, accounting fees, and other administrative expenses that may be paid from the CP assets are ignored. Possible income tax consequences are only considered in connection with determining the value of a right of recovery, as discussed in Part VII of this article.

Part II of this article discusses the Estate of MacDonald, the California Supreme Court decision that prompted the California Legislature to enact the nonprobate transfer statutes. Part III examines the Legislature's intent in enacting the Spousal Consent Rules; Part IV outlines how CP law, federal law, and the characteristics of an IRA as a nonprobate transfer asset together allow the Spouse to dispose of his 50% interest in a CP IRA; Part V explains how each spouse may dispose of an interest in a CP IRA; Part VI discusses the Spouse's right to dispose of his interest in a CP IRA; Part VII examines the process for the Spouse and the Spouse's estate to recover the value of a CP interest; Part VIII discusses the enforceability of an IRA beneficiary designation if one spouse violates the fiduciary duty that spouses owe to each other; Part IX describes each spouse's acts that can cause a change in either or both of their beneficiaries; Part X discusses spousal consent rule planning.

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In Estate of MacDonald,¹³ the wife signed written consent language printed as part of her husband's beneficiary designations for three CP IRAs, consenting to the beneficiary he named on all three forms—a trust distributed in large part to his children from a prior marriage.¹⁴ When the wife died, her estate nonetheless claimed a community property interest in each CP IRA.¹⁵ The husband disputed this claim, alleging, in part, that the wife's written consent¹⁶ was a waiver of the wife's CP rights and a transmutation of the wife's CP 50% interest in each IRA.¹⁷

In deciding whether the wife's consent was a legally enforceable transmutation, the California Supreme Court observed that under Civil Code section 5110.730, the statute governing transmutations at that time,¹⁸ a valid transmutation must be in writing and include an express declaration that is "made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected." In addition, the writing must state that the affected spouse knows that "the characterization or ownership" of the property is being changed.¹⁹

In interpreting the "express declaration" requirement, which the court considered ambiguous,²⁰ the Court noted that the requirement did not have to be satisfied by any particular language as long as the language clearly indicated an intent to change property rights.²¹ In its reasoning, the Court examined the legislative history of Civil Code section 5110.730 indicating that satisfaction of this requirement must be based solely on the consent language itself. The Court also held that the Legislature had intended courts to determine the validity of a transmutation based solely on whether the consent language satisfied the requirements of the statute, without having to consider often unreliable extrinsic evidence caused by spouses perjuring themselves.²² In Estate of MacDonald, the Court held that the wife's signed written consent was not a transmutation because the wording did not indicate her intent to change her property rights, and, therefore, at her death, she owned a community property interest in each of her husband's CP IRAs.²³

The California Legislature responded to the MacDonald decision by enacting the Spousal Consent Rules. Because the Legislature enacted the nonprobate transfer statutes, including the Spousal Consent Rules, as recommended by the California Law Revision Commission ("CLRC"), the CLRC recommendations reasonably inform that legislation. The court in Estate of Miramontes-Najera²⁴ quotes language from the CLRC recommendations as the Legislature's intent in interpreting two of the most important Spousal Consent Rules: Probate Code section 5020 and section5021, subdivision (a).

Two of the CLRC's governing principles, as described in its recommendations, were: (1) as an equal owner of CP, each spouse should have the right to control the disposition of their half of the community property; and (2) "a spouse's written expression of intent should control over contrary statutory default rules governing disposition of a spouse's interest in community property at death."²⁵

The CLRC recognized that it did not have to start with a new statutory framework. Its recommendations express the intent to codify the general principles governing CP gifts by one spouse.²⁶ Those recommendations explain that the Consent Rules constitute an

. . . express codification of the gift rule for nonprobate transfers of community property. Thus, a donative transfer of community property is voidable as to the one-half interest of the donor's spouse if made without the written consent of the spouse.²⁷

The CLRC acknowledged the established remedy that allowed a non-consenting spouse to recover half of the gift or half its value, and recommended additional options to recover that value:

[w]hile existing law governing gifts provides for recovery of one-half of the community property gift