§11.03 Property Rights After Separation

• Jurisdiction: Washington

§ 11.03 PROPERTY RIGHTS AFTER SEPARATION

Whether parties are "separated" impacts not only the characterization of property acquired after the "separation," but also the management of property, support, inheritance, and the rights of others, such as creditors.

[1] Inheritance and Probate Rights

Separation does not terminate the status of the marriage or domestic partnership for purposes of inheritance and probate. The following rights apply after the parties' separation:

1. The parties retain their statutory right to administer the estate of the decedent spouse or state registered domestic partner. RCW 11.28.030.
2. The surviving spouse or state registered domestic partner retains the statutory right to intestate succession. See RCW 11.04.015(1).
3. The surviving spouse or state registered domestic partner retains the statutory right to receive one-half of the community property, irrespective of the terms of the decedent's will. See RCW 11.11.020(1).
4. The right to petition the probate court for family support is not extinguished. See RCW 11.54.010.
5. The right to claim an award in lieu of homestead still exists. See Togliatti v. Robinson, 29 Wn.2d 844, 847, 190 P.2d 195 (1948).

[2] Community Insurance Policies

Will parties living separately continue to be covered under insurance policies obtained by the community prior to separation? In Hawaiian Insurance & Guaranty Co. v. Federated American Insurance Co., 13 Wn. App. 7, 534 P.2d 48 (1975), the husband was issued an automobile insurance policy that also insured his spouse if they were residents of the same household. The parties separated for a period and both moved from the family apartment. Subsequently, the wife was involved in an automobile accident. Shortly after the automobile accident, the parties reconciled for a brief period and then permanently separated. A coverage dispute arose between the liability carrier for the husband and the uninsured motorist carrier for the injured party. The trial court ruled that the parties were separated, and thus the spouse was not "a resident of the same household" and therefore not entitled to coverage. The Court of Appeals reviewed several cases dealing specifically with coverage after the period that one spouse has separated from the other, determining that the basic inquiry should be whether the separation was intended to be "permanent without the prospect of reunion or temporary with reconciliation a possibility. Coverage continues where a spouse leaves in hope that a reconciliation may take place; but where the fixed intent is to depart permanently and reconciliation is not contemplated, coverage ceases." Id. at 20. Thus, the Court of Appeals reversed the lower court, holding that there was insufficient evidence that at the time of the accident the parties intended to remain permanently separated.

With respect to term life insurance policies after separation, mere status as a surviving spouse is not a sufficient basis for a community property claim. See Francis v. Francis, 89 Wn.2d 511, 573 P.3d 369 (1978). The ownership character of a term life insurance policy depends upon the character of the funds used to pay the premium for the most recent term. See Aetna Life Ins. Co. v. Bunt, 110 Wn.2d 368, 371, 754 P.2d 993 (1988); Aetna Life Ins. Co. v. Wadsworth, 102 Wn.2d 652, 689 P.2d 46 (1984).

In Wadsworth, a life insurer commenced an interpleader action to determine whether the deceased insured's first or second wife was entitled to the proceeds of a group term life policy. 102 Wn.2d at 653. Joan and Lawrence Wadsworth were married in 1949. In 1963, Aetna Life Insurance Company issued a group term life insurance policy covering Boeing employees, including Lawrence. Joan was designated as beneficiary. Id. at 654.

Joan and Lawrence were divorced on August 3, 1978, and the dissolution decree incorporated a separation contract executed by the parties. Joan conveyed to Lawrence ' "as his sole and separate property, free and clear of any right, title, or interest on her part . . . [a]ll life insurance policies' insuring his life." Lawrence married his second wife, Sharon, the same day. However, Lawrence never changed the designation of Joan as beneficiary of the group policy. Id.

Lawrence died intestate on January 10, 1981, and Sharon claimed the proceeds of the group policy as Lawrence's surviving spouse. Aetna commenced an interpleader action to determine whether Sharon or Joan should receive the policy proceeds. The trial court granted Sharon's motion for summary judgment and awarded her the policy proceeds, and Joan appealed. Id. at 655. The Court of Appeals found that the dissolution decree divested Joan of any interest in the same, including her right to be named as beneficiary, and converted the group policy into Lawrence's separate property. The court further determined that thereafter, ownership of the policy or its proceeds was both separate and community property in proportion to the percentage of the total premiums paid. Thus, Sharon obtained a community property interest in only that portion of the proceeds attributable to the premiums paid with community funds after her marriage to Lawrence. Id. at 655. The Court of Appeals reversed and remanded the case to the trial court, and Sharon filed a petition for review. Id.

The Supreme Court considered the "risk payment theory," which takes into account the manner in which values accrue under various types of policies. Under this theory, the proceeds of a life insurance policy are characterized by determining the source of funds that paid for the risk portion of the policy. Id. at 658. The court held that the character of funds used to pay for the most recent term should determine the character of a term life insurance policy, id. at 659, and determined that because community funds of Sharon and Lawrence were used to purchase coverage for the most recent term, and any coverage paid for by the marital community of Lawrence and Joan had expired without loss long before Lawrence's death, the policy was the community property of Lawrence and Sharon, so that Sharon became entitled to one half of the proceeds of the policy upon the insured's death, id. at 660.

The court then reviewed the issue of Lawrence's designation of Joan as his beneficiary, which was inconsistent with the separation contract signed by the parties. The court held that in general, the beneficiary named in the policy will be entitled to the proceeds to the extent that the present spouse's community property rights are not invaded.

A dissolution decree will divest the former spouse of his or her expectancy as named beneficiary, however, if (1) the dissolution decree, in clear and specific language, states that the former spouse is to be divested of his or her expectancy as beneficiary and (2) the policy owner formally executes this stated intention to change the beneficiary within a reasonable time after the dissolution decree has been entered.

Id. at 663. However, the clause in the dissolution decree will be ineffective and the former spouse, if named beneficiary, will be entitled to the proceeds, if a reasonable time has passed and no changes have been made to the beneficiary designation. Thus, the court ruled that Joan was entitled to the life insurance proceeds to the extent that no community property rights were invaded. Id. at 664.

The Wadsworth rule was adopted to "encourage individuals to consider carefully the disposition of life insurance policies in dissolution" and to "simplify the procedure of determining to whom life insurance proceeds are to be distributed." Id. at 663. But the result in Wadsworth was criticized as being contrary to what most divorcing couples would want. As a result, the Washington State Bar Association recommended the enactment of an automatic revocation provision, now codified as RCW 11.07.010. See Mearns v. Scharbach, 103 Wn. App. 498, 507, 12 P.3d 1048 (2000). By adopting RCW 11.07.010, the legislature sought to codify the assumption that divorcing couples wanted to change the beneficiary designations on nonprobate assets upon dissolution or invalidity of their marriage by using a mechanism similar to revocation provisions applicable to wills. Id. By choosing this mechanism, the legislators demonstrated their understanding that life insurance and other nonprobate assets are widely used as essential parts of estate planning and should be treated accordingly. Id. The adoption of this bright-line rule triggered by the date of dissolution or invalidation of marriage demonstrates the legislative intent that couples should resolve their estate planning questions when terminating their marital relationships. Id.

The adoption of RCW 11.07.010 is also an extension of the portion of the Wadsworth rule that stated that a former spouse would not be entitled to the proceeds if the insured spouse died within a "reasonable time" after the entry of the dissolution decree without formally executing the previously stated intention to change the beneficiary. Mearns, 103 Wn. App. at 508. After considering the intent and operation of the insurance revocation statute, the Mearns court determined that any redesignation of a beneficiary had to be in writing. Id.

Comment: RCW 11.07.010(2) provides for a statutory exception, which reads as follows:

(b) this subsection does not apply if and to the extent that:
* * * (ii) the decree of dissolution, declaration of invalidity, or other court order requires that the decedent maintain a nonprobate asset for the benefit of a former spouse or children of the marriage or domestic partnership, payable on the decedent's death either outright or in trust, and other nonprobate assets of the decedent fulfilling such a requirement for the benefit of the former spouse or former domestic partner or children of the marriage do not exist at the decedent's death.

[3] Property Acquisition After Separation

Property acquired by parties who live separate...