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Saturday, December 8, 2012

Article on Testamentary Diposition of Non-probate Assets

Unknown-2Ashley L. Haskins (J.D. May 2012, University of Arkansas at Little Rock) recently published her note entitled Estate and Probate Law--Testamentary Disposition of Non-probate Assets: Whether IRAs are Comparable to Life Insurance Policies and Whether Testators Should Be Able to Change an IRA Beneficiary By Will (Nunnenman v. Estate of Grubbs, 20120 Ark. App. 75, _S.W.3d_.), 34 U. Ark. Little Rock L. Rev. 153-171 (2011).  The introduction to the article is available below: 

Most courts have held that any attempt to change the beneficiary of a life insurance policy by will is ineffectual where the policy "specifies the manner in which the change may be made."  Rather, a policyholder must adhere to the insurance company's procedure for amending a beneficiary designation in order for a modification to be valid.  Contrary to the consensus of a vast majority of the states, Arkansas law recognizes testamentary changes to insurance beneficiaries as long as the insurance policy to be changed is specifically identified, and the testator's intent to change the beneficiary is clear. Arkansas courts, however, have not been confronted with the issue of whether this unique doctrine should be extended to other non-probate assets until recently. Nunnenman v. Estate of Grubbs  considered whether a purported amendment to a beneficiary designation by holographic will effectively changed the beneficiary of an individual retirement account (IRA). 

In Estate of Grubbs, the decedent named Nunnenman as the sole beneficiary of his IRA.  On the account, Nunnenman "was identified by name, social security number, and date of birth."  Two years later, the decedent died following a brief hospitalization. Significantly, days before his death,  the decedent executed a last will and testament that left his entire estate to his mother, Shervena Grubbs. Although the IRA was not specifically referenced in the will, Ms. Grubbs argued she was the rightful beneficiary. She attempted to support her argument by proffering a handwritten note that purportedly changed the beneficiary designation on the decedent's IRA from Nunnenman to Ms. Grubbs. 

The appellate court refused to uphold the testamentary change to the decedent's IRA.  The importance of this case, however, rests in dicta where the court insinuates it would have affirmed the district court's extension of the law for insurance policies to IRAs if the handwritten note had qualified as a valid holographic will. In her dissent, Judge Hart strongly urges that this is inappropriate due to important differences between IRAs and life insurance policies. 

The standard required to validate life insurance beneficiary changes by will seems relatively easy to satisfy: 1) specifically identify the account and 2) ensure that the testator's intent to change the beneficiary is clear.  Allowing testamentary changes to beneficiaries of non-probate assets can lead to many problems, including an increased risk of fraud and unnecessary litigation, which arguably defeats the purpose of non-probate assets. IRAs serve a different purpose than that of life insurance policies; therefore, the court's apparent willingness to directly extend the law applying to life insurance policies was in error. By comparing Arkansas's reasoning with that of other states as well as federal law, this note will show that if the courts wish to allow testamentary changes to IRAs and other non-probate assets, a much more coherent and strenuous test should be applied.  In order to encourage people to comply with company policies regarding beneficiary changes, testamentary disposition of non-probate assets should be the exception rather than the rule.

This note will begin by explaining the relevant reasoning in Estate of Grubbs.  Next, it will discuss the history and general agreement among other states with regard to the testamentary disposition of life insurance policy proceeds. Then, the history of Arkansas's unique approach will be  established, followed by a brief section comparing and contrasting Arkansas law with that of other states.  After that, this note will examine the inherent differences between life insurance policies and IRAs and will argue that such distinctions require IRAs to be treated differently than life insurance policies by not allowing testamentary changes to IRA beneficiaries.  Alternatively, if Arkansas courts choose to allow testamentary changes to IRA beneficiaries, this note will propose that courts should require such changes to meet a more rigorous standard than the current standard used to validate testamentary changes to life insurance beneficiaries. Finally, the note will conclude with a brief summary and restatement of the pertinent issue and arguments.

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