When a man dies in California, who gets the proceeds of his life insurance policy? The answer seems obvious: the named beneficiaries in the paperwork received and accepted by life insurance company.
But what if the man gave the policy away during his lifetime? Can he cancel the gift and redirect the proceeds to others? No, said the California Court of Appeal in Dudek v. Dudek (2019) ___ Cal.App.5th ____. Even though the life insurance company may not have recognized the gift, its recipient can recover the policy proceeds from those who received them.
A Tale of Two Brothers and Shared Bone Marrow
Like many of the California trust and estate disputes that we see, this is a story of two siblings and a relationship that apparently went awry. In 2001, J.D. Dudek obtained a Genworth life insurance policy with a $1 million death benefit. A few years later he was diagnosed with acute lymphoblastic leukemia. His brother David allegedly acted as a bone marrow donor and the donation prolonged J.D.’s life.
At the end of 2009, J.D. executed a life insurance trust, naming David as trustee and beneficiary. In the trust instrument, J.D. declared that he was transferring the Genworth policy to David. He also declared that the policy was irrevocable.
A month later, J.D. submitted paperwork to Genworth, signed by both J.D. and David, requesting that the owner and beneficiary of the policy be changed to David as trustee of the trust. J.D., however, crossed out some of the information on the Genworth forms and wrote in corrections without initialing them. Genworth rejected the forms because of the uninitialed changes, notifying J.D. but not David.
Six years later, and shortly before his death, J.D. executed new beneficiary change forms and submitted them to Genworth, which accepted them. In those forms, J.D. named nine death beneficiaries, but did not include his brother David.
When JD died in 2016, David tried to obtain the policy proceeds from Genworth, but it declined to hold them, instead distributing them out to the nine newly-designated beneficiaries. David also had no luck getting the money from those beneficiaries, so he sued them.
The Gift of the Policy, Once Made, Was Binding
A San Diego County Superior Court judge ruled that the life insurance trust had not been funded and was therefore unenforceable, inasmuch as J.D. never succeeded in having the ownership and beneficiary designations changed with Genworth to match the terms of the trust.
The Court of Appeal disagreed. It examined property law rules, and in particular the laws of donative transfers or gifts, to determine whether J.D. effectively had made a gift of the policy to David. The court leaned heavily on the Restatement Third of Trusts, published by the American Law Institute, for guiding legal principles, noting that California trust law essentially is derived from the Restatement.
The court found that the trust instrument met all of the necessary elements to qualify as a donative transfer document. “Specifically, the Trust document evidences that J.D. had the intent to effectuate an immediate, complete and irrevocable transfer of ownership of the Policy to David, as trustee.” Moreover, J.D. signed the trust instrument and delivered it to David, manifesting J.D.’s intent that the instrument be operative.
Hence, since J.D. no longer owned the policy after transferring it to David, J.D.’s subsequent attempt to change the beneficiaries was ineffective. He could not give away what he no longer owned.
J.D.’s failure to effectively change the owner/beneficiary forms with Genworth was immaterial as between J.D. and David. Genworth was protected from claims by David for the wrongful distribution of the policy proceeds, but he was still entitled to seek and recover the policy proceeds from the nine people who received them.
Specifically, in a petition filed in probate court under California Probate Code section 850, David as trustee of the life insurance trust could seek to recover the policy proceeds on the ground that the nine recipients were not entitled to them. David also could seek a penalty against the recipients under Probate Code section 859 for taking the policy proceeds wrongfully and in bad faith, though this might be hard to show under the circumstances.
Overall, J.D.’s gift of the proceeds to his brother David could be enforced even though J.D. had not perfected the gift with the life insurance company.
Lessons Learned
In California, while death beneficiary designations on life insurance policies and other assets generally establish who gets the asset upon the decedent’s death, the decedent may already have given away his interest in the asset in an enforceable way.
Interestingly, if David had sued Genworth before it distributed the policy proceeds, he may have had an easier path to recovery of the money. Genworth, when sued, may have held the money pending direction from the court. While the appellate court gave David the green light to sue the nine beneficiaries, he will need to obtain and collect judgments against each of them, which may not be easy given their financial circumstances and the fact that some apparently do not reside in California.
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