Multiple-party accounts, defined in §5132 of the California Probate Code, include joint accounts, pay on death (“POD”) accounts, and Totten trust accounts. Multiple-party accounts provide a means of transferring the ownership of property, including account proceeds, to another upon death without the need for formal probate proceedings (a “nonprobate transfer”).
Occasionally, a credit union will receive a request to disburse funds from a multiple-party account following the death of a member. While specific screening procedures may deviate slightly depending on the type of account, the credit union is generally protected from liability when it pays the account proceeds according to the terms of the account agreement and applicable law to a surviving joint owner, a POD payee (or “POD beneficiary”), as instructed by the trustee of a Totten trust, or to a properly-vetted personal representative or heir to the deceased party when there is no joint owner or POD beneficiary. Probate Code §5405 discharges the credit union from all claims for the amounts paid, even if the payment was not consistent with the beneficial ownership of the account as between parties, POD beneficiaries, or any of their respective successors. In other words, §5405 limits a credit union’s liability when it merely follows the express wishes for a decedent’s transfer of his or her property memorialized in a contractual agreement executed by that member before death, unless a court order provides different instructions. Only noncompliance with a court order restraining payment, or with written notice from an interested party that more than one signature is required pending formal determination of rights, will prevent the credit union from receiving the protections provided in §5405.
However, the Probate Code also addresses a precise, potentially problematic, situation: nonprobate transfers to a former spouse. Probate Code §5040 states that, if a POD beneficiary was the deceased member’s spouse at the time the contractual agreement for the multiple-party account was executed, but is no longer the member’s spouse at the time of his death (due to a dissolution or annulment of the marriage or termination of the registered domestic partnership), the transfer of funds fails. In the same manner, §5042 states that, if a surviving joint owner is the deceased member’s former spouse, the joint tenancy is severed and the contractual agreement should be treated as if the former spouse predeceased the member.
Under certain conditions specified in §5040(b), a nonprobate transfer to a POD beneficiary, who is a former spouse???, will not fail, including:
1. The nonprobate transfer is not subject to revocation by the transferor at the time of the transferor’s death.
2. There is clear and convincing evidence that the transferor intended to preserve the nonprobate transfer to the former spouse.
3. A court order that the nonprobate transfer be maintained on behalf of the former spouse is in effect at the time of the transferor’s death.
Likewise, under §5042(b), a joint tenancy is not subject to severance under either of the following conditions:
1. The joint tenancy is not subject to severance by the decedent at the time of the decedent’s death.
2. There is clear and convincing evidence that the decedent intended to preserve the joint tenancy in favor of the former spouse.
This creates a murky area of the law. On one hand, §§5040 and 5042 seem to have been created with the intent of stopping an enterprising former spouse from receiving funds they were not meant to possess due to failure to update the account agreement. In that vein, the hope appears to be that the credit union will request information, outside the contractual agreement, to stop that former spouse from doing so. On the other hand, no portion of the Probate Code requires a credit union to inquire as to the marital status of the joint owner or POD beneficiary to trigger the protections of §5405. While a credit union may decide that setting up a procedure to “flush out” a former spouse may protect it from paying incorrectly, this presents a legal dilemma as it also removes the credit union from the liability protections afforded by §5405, as that credit union would no longer be paying in accordance with the terms of the account agreement. Contrarily, if a credit union remains willfully blind of a dissolution, annulment, or termination of a marriage or domestic partnership, it is unclear whether the credit union remains protected under Probate Code §5405 in the event the payment ultimately was made to a former spouse.
We believe the only situation in which there is clear-cut direction is if the credit union knows of a former spouse (by dissolution, annulment, or termination) who has remained as a joint owner or POD beneficiary on an account, and who presents the credit union with proof of death of the member on that account. In this instance, payout would require a court order or other clear and convincing evidence that the former spouse was intended to remain as a joint owner or POD beneficiary. Here, we believe freezing the account and involving your attorney to analyze any evidence provided in favor of payment to the former spouse would be a reasonable plan of action.