A relatively minor topic that doesn't seem to get much coverage is one's ability to change death beneficiaries on nonprobate assets (e.g., life insurance policies, retirement accounts, etc.) after obtaining his or her spouse's consent to the transfer. This may come up for example, if you and your spouse decide on the beneficiaries of your life insurance policy, and subsequently your spouse passes away.

For this, we turn to California Probate Code Section 5023, which states:

(a) As used in this section “modification” means revocation of a provision for a nonprobate transfer on death in whole or part, designation of a different beneficiary, or election of a different benefit or payment option. As used in this section, “modification” does not mean, and this section does not apply to, the exercise of a power of appointment under a trust.

(b) If a married person executes a provision for a nonprobate transfer of community property on death with the written consent of the person’s spouse and thereafter executes a modification of the provision for transfer of the property without written consent of the spouse, the modification is effective as to the person’s interest in the community property and has the following effect on the spouse’s interest in the community property:

(1) If the person executes the modification during the spouse’s lifetime, the modification revokes the spouse’s previous written consent to the provision for transfer of the property.

(2) If the person executes the modification after the spouse’s death, the modification does not affect the spouse’s previous written consent to the provision for transfer of the property, and the spouse’s interest in the community property is subject to the nonprobate transfer on death as consented to by the spouse.

(3) If a written expression of intent of a party in the provision for transfer of the property or in the written consent to the provision for transfer of the property authorizes the person to execute a modification after the spouse’s death, the spouse’s interest in the community property is deemed transferred to the married person on the spouse’s death, and the modification is effective as to both the person’s and the spouse’s interests in the community property.

Reading through the code section above, generally reinforces the idea that absent some sort of writing by your spouse indicating that you may subsequently modify your beneficiary designations, you only have the ability to control the transfer of your 1/2 interest in community property.

Like most rules, however, there is an exception. Retirement plans that are subject to ERISA laws (2 common examples 401(k)s and 403(b)s) have particular rules. For divorce purposes, your spouse may have a community property interest in those accounts; however, for purposes of transfers upon death, if your spouse passes away before you, his or her community property interest in the 401(k) or 403(b) would pass to you.

Although this may seem surprising on the surface, in reality, I rarely see this become an issue. Very often spouses will name each other as the primary beneficiary on nonprobate assets such as retirement accounts and life insurance policies. That means that the surviving spouse will become the owner of the asset anyway. In fact, for retirement accounts, naming your spouse as the primary beneficiary may have some tax benefits such as the ability for your spouse to rollover your retirement account into a spousal rollover IRA so that he or she may continue to receive the tax deferred growth on the account.

What are your options if your spouse named someone other than you as a beneficiary on a community property life insurance policy or retirement account?

California Probate Code Section 5021 states that: 

 (a) In a proceeding to set aside a nonprobate transfer of community property on death made pursuant to a provision for transfer of the property executed by a married person without the written consent of the person’s spouse, the court shall set aside the transfer as to the nonconsenting spouse’s interest in the property, subject to terms and conditions or other remedies that appear equitable under the circumstances of the case, taking into account the rights of all interested persons.

(b) Nothing in subdivision (a) affects any additional remedy the nonconsenting spouse may have against the person’s estate for a nonprobate transfer of community property on death without the spouse’s written consent.

Therefore, a court is permitted to set aside a nonprobate transfer of community property (for example, the naming of someone other than a spouse as a beneficiary of a community property retirement account) if the other spouse does not consent.

Many financial institutions forms and life insurance forms have a place where spousal consent must be indicated by his or her signature. That being said, if there is no place for a spouse to sign, you should contact the financial institution to see about how to fulfill this requirement.

There are a whole class of assets that pass without the need for probate, if you've properly named beneficiaries on those accounts. These include life insurance policies, pay-on-death accounts, and retirement plans (e.g., IRAs, 401ks, etc.).

If you acquired any of these assets during marriage, and absent an agreement between you and your spouse to the contrary, each spouse should have a 1/2 interest in each since they would be considered community property. Therefore, even if you've been funding your 401k plan at work with your salary, because that salary is considered community property, your spouse has a 1/2 interest in the account.

Because the law recognizes the community property nature of these assets, if you want to name a beneficiary for your 401k (other than your spouse), your spouse must consent and typically must also sign the beneficiary designation form waiving his or her right.

Check out California Probate Code Section 5020, which states:

"A provision for a nonprobate transfer of community property on death executed by a married person without the written consent of the person’s spouse (1) is not effective as to the nonconsenting spouse’s interest in the property and (2) does not affect the nonconsenting spouse’s disposition on death of the nonconsenting spouse’s interest in the community property by will, intestate succession, or nonprobate transfer."

If you're like many clients, you have probably never checked on the beneficiary designations on assets such as life insurance policies or retirement accounts since you acquired them. You might have acquired some of those accounts before you got married and named your parents or a sibling as the beneficiary.

Part of the estate planning process should entail you reviewing assets which are transferred by beneficiary designation to make sure they are up to date.

College education planning is a huge part of estate planning, and doing it in the right way can help you save money in the long run. A gift that the federal government has given everyone is the 529 Account, which allows you to make annual exclusion gifts ($15,000 in 2018) to a special account established for your child's education. In addition, the money contributed grows income tax deferred, and is generally not included in your estate for estate tax purposes.

Financial Management

One of the key aspects of planning for college, however, isn't the available tax techniques but rather the management of your finances. If you're heavily in debt or don't have the money available to put away for your child's education, a 529 Account is pointless. After all, you have to take care of your families basic needs before planning for future ones.

That being said, if you and your family have additional resources, placing them into a 529 Account can be a huge benefit to your children. The money that you put into a 529 Account, if you invest it wisely while the child is still young, can grow over time, so that when you do eventually need to pull money out, it may be substantially greater than what you put in.

Estate Planning

On the gift tax, income tax, and estate tax side, a 529 Account makes a great deal of sense as well.

First, because you are making an annual exclusion gift, there is no gift tax that is due on your contribution.

Second, because the account grows with income tax deferred, there is no income tax to pay on the growth of the account.

Finally, the amounts you contribute aren't considered part of your estate for estate tax purposes, so they will not be counted when determining whether any estate tax is due.

Potential Risks

Although 529 Accounts have a great number of benefits, there are some things to be aware of.

First, if you elect to contribute 5 years worth of annual exclusion gifts to a 529 account in a single year (a special feature that's available for these types of accounts) and you die prior to the 5 year period, a proportion of your contribution will be included in your estate tax for estate tax purposes.

Second, while withdrawals for qualified educational expenses are completely tax free, non-qualified distributions are subject to a 10% penalty on the account's earnings as well as taxation at the recipient's income tax rate.

For many, the benefits of a 529 Account far outweigh the risks, and are a very useful way to help families afford the high cost of college education.