BILL ANALYSIS
AB 873
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Date of Hearing: April 3, 2001
ASSEMBLY COMMITTEE ON JUDICIARY
Darrell Steinberg, Chair
AB 873 (Harman) - As Amended: March 28, 2001
SUBJECT : EFFECT OF DISSOLUTION OF MARRIAGE ON NONPROBATE
TRANSFERS OF PROPERTY; TEMPORARY RESTRAINING ORDERS
KEY ISSUES :
1)SHOULD THE DEFAULT RULE BE THAT TRUSTS, LIFE INSURANCE
POLICIES, PAYMENT-ON-DEATH BANK ACCOUNTS, TITLE TO PROPERTY IN
JOINT TENANCY AND OTHER SUCH NONPROBATE TRANSFERS NAMING A
SPOUSE AS THE BENEFICIARY FAIL UPON DISSOLUTION OR ANNULMENT
OF THE MARRIAGE?
2)SHOULD PARTIES BE ABLE TO ENGAGE IN VARIOUS TYPES OF ESTATE
PLANNING AND DESIGNATION OF BENEFICIARIES OF PROPERTY DURING
THE PENDENCY OF A DISSOLUTION?
SYNOPSIS
This Bill Seeks To Conform The Treatment Of Property Devised By
Will And Property Acquired Through Various Types Of Nonprobate
Transfers (Including Life Insurance, Trusts, Payment-On-Death
Accounts, And Property Taken In Joint Tenancy) With Respect To
The Effect Of A Dissolution Of Marriage Or Annulment. The Bill
Provides That, Absent Clear And Convincing Evidence, A
Dissolution Of Marriage Or Annulment Has The Effect Of Canceling
A Designation Of The Now Former Spouse As The Beneficiary Of Any
Such Nonprobate Transfer. The Bill Also Seeks To Clarify That
Various Estate Planning Changes Which Purportedly Do Not Affect
A Party's Property Interest May Be Made During A Dissolution
Proceeding, Including Creating, Revoking Or Modifying A Will, Or
Revoking Certain Nonprobate Transfers.
SUMMARY : Seeks to clarify the effect of the filing and
judgment of a marital dissolution on nonprobate transfers, such
as revocable trusts, pay-on-death accounts, joint tenancy title,
and other instruments which have the effect of passing property
on death while avoiding probate. Specifically, this bill :
1)Provides that a nonprobate transfer to the transferor's former
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spouse in an instrument executed before or during the marriage
fails, and a joint tenancy created before or during the
marriage is severed if parties have divorced or gotten an
annulment of their marriage.
2)Makes an exception to 1), above, if the transferor was not
permitted (by, for example, contract) to revoke the transfer,
if there is clear and convincing evidence that the transferor
intended to preserve the nonprobate transfer in favor of the
former spouse, or if a court has ordered that the instrument
be maintained on behalf of the former spouse.
3)Defines "nonprobate transfer" as a provision for a nonprobate
transfer on death in an insurance policy, contract of
employment, bond, mortgage, promissory note, security, pension
plan, IRA, trust, or other similar transfer upon death (other
than by means of a will) which avoids probate.
4)Provides, similar to the protections regarding property
disposed of through wills, that this law does not affect the
rights of a subsequent purchaser for value who in good faith
relies upon an apparent severance of a joint tenancy or the
failure of a nonprobate transfer.
5)Makes this provision applicable to all nonprobate transfers
and joint tenancies executed on, before, or after the
effective date of this section, for all dissolutions or
annulments that occur after January 1, 2002 (unless the person
making the nonprobate transfer or creating the joint tenancy
died prior to that date.)
6)Authorizes parties, notwithstanding the automatic restraint on
party's ability to dispose of property during the pendency of
a dissolution or legal separation, to create, modify, or
revoke a will, revoke a nonprobate transfer (with the
exception of insurance policies or other coverage), eliminate
a right of survivorship, or create an unfunded trust. Notice
must be provided before revoking a nonprobate transfer or
eliminating a right of survivorship.
7)Expressly prohibits parties under the terms of the automatic
restraint on disposition of property during the pendency of a
dissolution, from creating or modifying a nonprobate transfer
in a manner that affects the disposition of property without
the written consent of the other party or an order of the
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court.
EXISTING LAW :
1)Requires any petition for, and judgement of, dissolution of
marriage, annulment, or legal separation to contain a notice
informing parties to review their wills, insurance policies,
retirement benefit plans, credit cards, credit accounts, and
other matters "that you may want to change in view of the"
dissolution, annulment, or legal separation. The notice
specifies that dissolution or annulment "may automatically
change a disposition made by your will to your former spouse."
(Family Code section 2024.)
2)Provides that, absent an express statement to the contrary in
a will, the dissolution or annulment of the testator's
marriage revokes any disposition or appointment of property
made in the will to the former spouse. (Probate Code sections
6122 and 6227. All further statutory references are to the
cod unless otherwise noted.)
3)Provides that, if property designated under a will fails to
pass to a former spouse pursuant to 2), above, it passes as if
the former spouse failed to survive the testator. (Sections
6122 and 6227.)
4)Provides that, in any action for dissolution, annulment, or
legal separation, the summons shall include an automatic
temporary restraining order (ATRO) restraining both parties
from: a) removing the minor children from the state without
consent; b) "transferring, encumbering, hypothecating,
concealing, or in any way disposing of any property, real or
personal, whether community, quasi-community, or separate,
without consent; and c) cashing, borrowing against, canceling,
transferring, disposing of, or changing the beneficiaries of
any insurance or other coverage, including life, health,
automobile, and disability, held for the benefit of the
parties and the children. (Family Code section 2040.) The
ATRO is effective as against the petitioner upon the filing of
the petition and issuance of the summons, and is effective as
against the respondent upon service of the petition and
summons. (Family Code section 233.)
5)Provides that, the ATRO shall not affect the rights, title,
and interest of a good faith purchaser who, for value and
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without knowledge of the ATRO, purchases property subject to
restraint. (Family Code section 2041.)
6)Requires consent of both spouses to provide for a nonprobate
transfer of community property upon the death of one of the
spouses. Absent such consent, the transfer is not effective
as to the nonconsenting spouse's interest in the property.
(Section 5020.)
7)Authorizes an individual, by will, to dispose of his or her
separate property, and the one-half of community and
quasi-community property that belongs to him or her. (Section
6101.)
FISCAL EFFECT : This bill as currently in print is keyed
fiscal.
COMMENTS : This proposal seeks to implement two recommendations
of the California Law Revision Commission. The first addresses
the effect of marital dissolution on named beneficiaries of life
insurance policies, retirement death benefits, revocable trusts,
and other "nonprobate transfers." The second seeks to limit the
reach of automatic temporary restraining orders, concerning the
disposition of property while a marital dissolution is pending,
to allow parties to a dissolution to make certain estate
planning decisions.
Effect of Divorce or Annulment on Beneficiaries to Various
Nonprobate Transfers . The author, drawing from the
recommendations of the Law Revision Commission, notes that "[i]n
California, as in most states, the dissolution or annulment of a
person's marriage automatically revokes a disposition to a
former spouse in that person's will. This policy is based on
the general assumption that typical divorcing parties will not
intend or expect a will provision benefiting a spouse to survive
the dissolution of their marriage. . . .California law does not
extend similar protection to a divorcing person who has chosen
to pass property on death by means of an instrument other than a
will." The author further argues that "the inconsistent
treatment of probate and nonprobate transfers after dissolution
of marriage does not make sense. If the typical divorcing
person does not intend to maintain a disposition benefiting a
spouse in a will, that person will likewise not wish to preserve
a disposition to a spouse in some other instrument." The Law
Revision Commission acknowledges that a large majority of states
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similarly provide disparate treatment to the effect of
dissolution or annulment on wills and nonprobate transfers.
The types of nonprobate transfers to which this bill apply
include: life insurance policies, trusts, retirement death
benefits, transfer-on-death financial accounts,
transfer-on-death vehicle registration, and property taken in
joint tenancy (having a right of survivorship).
The law currently provides that, absent an express statement in
the will to the contrary, a provision in a will awarding
property to a spouse is not valid if the parties divorce or get
an annulment of their marriage. According to the Law Revision
Commission, more and more, people are using other forms of
nonprobate transfers (also known as will substitutes) to provide
for the transfer of money or property upon death. Examples of
such nonprobate transfers include taking property in joint
tenancy, payment-on-death bank accounts, retirement death
benefits, and revocable trusts. Such nonprobate transfers,
however, are treated differently upon dissolution or annulment
than are provisions in wills. There is no express statement of
law that, like wills, nonprobate transfers of property to a
spouse will fail upon dissolution or annulment. This bill seeks
to provide such treatment. The Law Revision Commission notes
that "where a person inadvertently fails to change a provision
making a nonprobate transfer after divorce, the property will
pass to the former spouse, rather than to the person's estate.
This result is contrary to the probable intentions and
expectations of most divorcing parties."
The bill, however, provides an escape clause, allowing the
designation of the former spouse to control where the parties do
not intend the divorce to alter the nonprobate transfer,
providing that the transfer to the former spouse does not fail
if there is clear and convincing evidence that the transferor
intended to preserve the nonprobate transfer to the former
spouse.
ATROs and Estate Planning Through Nonprobate Transfers . The Law
Revision Commission explains that "existing law imposes an
automatic temporary restraining order (ATRO) on both parties in
a proceeding for dissolution or annulment of marriage, or legal
separation. . . .Except as necessary to pay attorney's fees or
ordinary expenses, the ATRO restrains the parties from
'transferring, encumbering, hypothecating, concealing, or in any
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way disposing of' . . . property without the consent of the
other party or an order of the court." However, "the extent to
which the ATRO restrains estate planning changes during a
dissolution proceeding is not clear."
This bill seeks to clarify the type of estate planning changes
that are permissible while the ATRO is in effect, and those that
are not. For example, the Commission provides that "the
beneficiary of a will has no vested property interest in the
will during the testator's life [merely an expectancy]. Thus, a
decision by one spouse to create, modify, or revoke a will
during a dissolution proceeding does not affect the rights of
the other spouse and should not be automatically restrained."
The Commission points out that the revocation of a revocable
nonprobate transfer is similar to revocation of a will in that
it terminates a mere expectancy - but does not otherwise dispose
of community property - and also should not be automatically
restrained. However, unlike wills, which may only dispose of
the testator's one-half of the community property, "modification
of a nonprobate transfer . . . can result in an unauthorized
transfer of community property," and therefore should be
prohibited during the pendency of a dissolution proceeding.
The bill therefore provides that an ATRO prohibits parties from
creating or modifying a nonprobate transfer in a manner that
affects the disposition of property, but does not restrain a
party from creating, modifying or revoking a will, revoking a
nonprobate transfer (except insurance or similar coverage for
the benefit of the spouse and/or children), severing a joint
tenancy, creating an unfunded trust, or disclaiming one's
separate property interest in a will or other instrument. In
order to minimize the opportunity for mischief, the bill
expressly requires notice to the other spouse before severing a
joint tenancy or revoking a nonprobate transfer.
REGISTERED SUPPORT / OPPOSITION :
Support
State Bar Estate Planning, Trust & Probate Law Section
(co-sponsor)
California Law Revision Commission (co-sponsor)
Opposition
AB 873
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None on file
Analysis Prepared by : Donna S. Hershkowitz / JUD. / (916)
319-2334