In Re the Estate of Fred N. Kirkes

SUPREME COURT OF ARIZONA
En Banc

In re the ) Arizona Supreme Court
ESTATE OF FRED N. KIRKES ) No. CV-12-0120-PR
)
) Court of Appeals
) Division Two
) No. 2 CA-CV 11-0072
)
) Pima County
) Superior Court
) No. PB20100346
)
) O P I N I O N
_________________________________ )

Appeal from the Superior Court in Pima County
The Honorable Charles V. Harrington, Judge

REVERSED
________________________________________________________________

Opinion of the Court of Appeals, Division Two
229 Ariz. 212, 273 P.3d 664 (2012)

AFFIRMED
________________________________________________________________

LAW OFFICE OF ETHAN STEELE, P.C. Tucson
By Ethan Steele

And

TIMOTHY A. OLCOTT, P.C. Green Valley
By Timothy A. Olcott
Attorneys for Gail J. Kirkes

WATERFALL, ECONOMIDIS, CALDWELL, HANSHAW,
& VILLAMANA, P.C. Tucson
By Jill D. Wiley
Attorneys for Joshua C. Kirkes
________________________________________________________________
B E R C H, Chief Justice

¶1 This case addresses whether a spouse, at death, can

leave more than one-half of a community-owned retirement account

to a non-spouse beneficiary. We conclude that, absent unusual

circumstances, the deceased spouse may, as long as the surviving

spouse receives at least one-half of the community’s value.

I. FACTS AND PROCEDURAL HISTORY

¶2 Fred Kirkes designated Joshua Kirkes, his son from a

prior marriage, as the beneficiary of 83 percent of a community-

owned individual retirement account (“IRA”). Gail Kirkes,

Fred’s wife at the time of his death, had previously been the

sole beneficiary on the account, which was held in Fred’s name.

She challenged the beneficiary designation, asking the superior

court to award her the entire account or, alternatively, to

increase her share based on her community interest.

¶3 Gail and Joshua filed cross-motions for summary

judgment. The superior court granted Gail’s motion, awarding

her 50 percent of the IRA. The court of appeals reversed.

Analogizing the account to life insurance proceeds, which this

Court has permitted the holder to leave to a third party, the

court remanded the case to the superior court to ensure an

equitable division of the community. In re Estate of Kirkes,

229 Ariz. 212, 215-16 ¶¶ 14, 18, 273 P.3d 664, 667-68 (App.

2012).

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¶4 We granted Gail’s petition for review to address a

recurring issue of statewide importance. We have jurisdiction

under Article 6, Section 5(3) of the Arizona Constitution and

A.R.S. § 12-120.24.

II. DISCUSSION

¶5 During marriage, each spouse has an undivided half

interest in community property. Nat’l Union Fire Ins. Co. of

Pittsburgh, Pa. v. Greene, 195 Ariz. 105, 110 ¶ 20, 985 P.2d

590, 595 (App. 1999). Generally, either spouse has the power to

dispose of community property, see A.R.S. § 25-214(C), and each

spouse owes the other certain fiduciary duties, Gerow v. Covill,

192 Ariz. 9, 18 ¶ 40, 960 P.2d 55, 64 (App. 1998).

¶6 Community property jurisdictions are split on whether

the disposition of non-probate community property at death

should be viewed as a whole, or whether the community interest

should be divided based on the value of each major asset.

Compare Estate of Wilson v. Bowens, 227 Cal. Rptr. 794, 798

(Cal. Ct. App. 1986) (payable on death designation on community

bank account effective only as to a one-half interest), with

Byrd v. Lanahan, 783 P.2d 426, 429 (Nev. 1989) (designation

effective to the extent the surviving spouse receives half of

the overall community). Upon the death of one spouse, the

community dissolves, with half of the value of community assets

going to the surviving spouse and the other half passing subject

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to disposition by the deceased spouse. Gaethje v. Gaethje, 7

Ariz. App. 544, 549, 441 P.2d 579, 584 (1968). States

restricting transfers of community property to a one-half

interest in individual assets are referred to as following an

“item theory,” while those applying the more flexible approach

follow an “aggregate theory.” See William A. Reppy, Jr.,

Application of the “Item Theory” to Fungible Community Property

Upon Death of Spouse Exercising Testamentary Power, 14 Com.

Prop. J. 1 (1987); see also Charles E. Zalesky, Comment, The

Modified Item Theory: An Alternative Method of Dividing

Community Property Upon the Death of a Spouse, 28 Idaho L. Rev.

1047 (1992).

¶7 The Arizona Legislature has adopted the aggregate

theory in allocating community property upon dissolution of

marriage. See A.R.S. § 25-318. And this Court has affirmed a

policy-owner’s right to designate a non-spouse beneficiary of a

life insurance policy, and, in doing so, implicitly approved of

the aggregate theory in the context of community-owned life

insurance. See Gristy v. Hudgens, 23 Ariz. 339, 347-48, 203

P. 569, 572 (1922), disapproved of on other grounds by Day v.

Clark, 36 Ariz. 353, 285 P. 682 (1930). But no Arizona statute

specifically addresses the issue here. Cf. A.R.S. § 14-3101(A)

(“Upon the death of a person, his separate property and his

share of community property devolves to the persons to whom the

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property is devised by his last will, . . . or to those

indicated as substitutes for them in cases involving

renunciation or other circumstances affecting the devolution of

intestate estates.” (Emphasis added.)).

¶8 In Gristy, we considered the effect of designating a

third party beneficiary on a life insurance policy for which the

premiums may have been paid with community funds. 23 Ariz. at

348, 203 P. at 572. Upholding the designation, we noted there

had been “no showing or statement that such funds were paid in

fraud of the wife’s rights, and no showing that the wife had not

received even more than her share of the community property.”

Id.

¶9 Gail counters that we have applied an item theory in

two other cases, La Tourette v. La Tourette, 15 Ariz. 200, 137

P. 426 (1914), disapproved of by Mortensen v. Knight, 81 Ariz.

325, 331, 305 P.2d 463, 467 (1956), and In re Monaghan’s Estate,

65 Ariz. 9, 173 P.2d 107 (1946). We find these cases

inapposite. La Tourette merely noted that one spouse has an

interest in the community property before the other spouse’s

death and that, at death, a spouse may dispose only of his or

her interest in the community, 15 Ariz. at 207-09, 137 P. at

428-29, propositions with which we agree, but which do not

resolve the question here. In re Monaghan’s Estate held that a

surviving wife’s share of the community could not be sold to

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satisfy probate expenses. 65 Ariz. at 22-23, 173 P.2d at 115.

Neither case adopts the item theory.

¶10 In contrast, on facts similar to those here, our court

of appeals has approved a father’s designation of his son from a

previous marriage as the beneficiary of a term life insurance

policy purchased with community assets. Gaethje, 7 Ariz. App.

at 549, 441 P.2d at 584. In Gaethje, the court relied on Gristy

to uphold the life insurance beneficiary designation because the

surviving wife received “at least as much in value as one[-]half

of all of the community and other jointly acquired property

(including therein the proceeds of the life insurance policy

here in question).” Id. That is, rather than looking at each

item of property, the court looked at the aggregate value of the

community property. Id.; see also In re Estate of Alarcon, 149

Ariz. 336, 339, 718 P.2d 989, 992 (1986) (describing Gaethje’s

consideration of value of all community property including

insurance proceeds as “[o]ne approach approved in Arizona”).

¶11 Because of the “unique nature” of retirement accounts,

Gail urges us to distinguish them from life insurance proceeds.

She argues primarily that retirement accounts are distinctive

financial planning devices that receive special creditor

protections and tax benefits, and therefore require special

protections for the surviving spouse.

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¶12 We decline to apply a different rule to retirement

accounts. Although such accounts are useful devices for

retirement planning, life insurance may serve similar purposes.

We likewise find Gail’s tax-related arguments unconvincing

because life insurance proceeds also enjoy preferential tax

treatment. See, e.g., I.R.C. § 101(a)(1) (excluding certain

life insurance benefits from gross income); A.R.S. § 43-1001(2),

(11) (basing state-taxed income on federal adjusted gross

income). Much like retirement accounts, insurance proceeds are

generally protected from estate creditors, see A.R.S. § 20-1131,

and may receive ongoing creditor protections through estate

planning. Compare id. § 14-10502 (spendthrift trusts), with id.

§ 33-1126(B) (IRA creditor protections). Moreover, both are

fungible assets. For these reasons, any distinctions do not

warrant different treatment.

¶13 Joshua asserts that A.R.S. § 14-3916, which authorizes

the personal representative to “consider community property held

outside the estate so that the division of community property

held in the estate and outside the estate is based on equal

value but is not necessarily proportionate,” answers the

question here. But that section does not control for two

reasons. First, the disposition of the IRA does not involve the

personal representative. Second, Gail seeks only one-half of

the IRA account. She did not claim that she would receive less

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than one–half of the community estate’s value if 83 percent of

the IRA went to Joshua. We do agree, though, that § 14-3916

supports the result we reach today by authorizing consideration

of the value of the entire estate, including both probate and

non-probate assets. See also A.R.S. § 14-1102(B)(2) (noting

underlying purpose of probate code to effectuate decedent’s

intent).

¶14 Although equitable considerations may occasionally

warrant a different outcome, Gail does not allege any unique

circumstances making Fred’s disposition of the IRA unjust. She

has not asserted fraud or claimed that she will receive less

than her full community share if the decedent’s beneficiary

designation is honored. We therefore hold that one spouse may

designate a non-spouse beneficiary of more than 50 percent of a

community property retirement account, as long as the other

spouse receives half of the community overall, and other

circumstances do not make the distribution fraudulent or unjust.

See, e.g., Finck v. Finck, 9 Ariz. App. 382, 388, 452 P.2d 709,

715 (1969) (“peculiar circumstances” warranted ensuring husband

maintained a one-half interest in community-owned stock after

divorce). The beneficiary designation here is effective.

III. CONCLUSION

¶15 For the foregoing reasons, we affirm the court of

appeals’ opinion and reverse the superior court’s order. The

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IRA shall be distributed in accordance with the beneficiary

designation.

__________________________________
Rebecca White Berch, Chief Justice

CONCURRING:

__________________________________
Scott Bales, Vice Chief Justice

__________________________________
A. John Pelander, Justice

__________________________________
Robert M. Brutinel, Justice

__________________________________
Michael J. Brown, Judge*

* Pursuant to Article 6, Section 3 of the Arizona
Constitution, the Honorable Michael J. Brown, Judge of the Court
of Appeals, Division One, was designated to sit in this matter.

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