Automatic injunction

Automatic Injunction Did Not Prevent Beneficiary Change

When a married person files for a divorce, Arizona law requires issuance of an automatic injunction. The injunction prevents changes in assets or titles until the divorce is resolved. It maintains the status quo while the legal system kicks into gear.

An automatic injunction also issues in other, related kinds of actions. For instance, filing for an annulment or a legal separation has the same effect: Arizona law requires issuance of the same automatic injunction.

Does the automatic injunction prevent any changes in one’s property after a divorce is filed? No, though the answer can be a little bit murky.

What about beneficiary designations?

Several state and federal court cases interpret Arizona’s statute to mean that divorce litigants can not remove property from the control of the divorce court. That usually does not prevent either spouse from making changes that do not transfer the property altogether.

For example, in one Arizona case the couple owned a piece of real property as joint tenants with right of survivorship. After filing an annulment petition, the husband transferred his interest in the property to a legal assistant in his lawyer’s office. She promptly transferred it back to him.

What was going on? Was there some nefarious transfer involving the husband’s lawyer? No. This was a classic “straw person” transaction — a method of destroying the right of survivorship while not disturbing the husband’s and wife’s joint ownership. The result? When the (now ex-) husband died shortly after the marriage was annulled, his half interest in the property went to his estate, not his ex-wife.

The Arizona courts decided that the husband had not really transferred the property away from its jurisdiction. He had just changed what would happen at his death.

The same logic ought to cover beneficiary designations, which might be changed during a divorce proceeding. In fact, another court (this time a federal court) applied the same statute to just that: a husband who changed the beneficiary on his life insurance policy while a divorce was pending. The automatic injunction did not prevent the change.

A recent Illinois case

Last week we read a new case from Illinois applying the same principles. Illinois’ statute is similar to Arizona’s; the couple involved in that case had filed something that looked like a separation proceeding under Arizona law. While the action was pending, the husband changed the beneficiary on his Individual Retirement Account (IRA) from his wife to his two sons. Was that permissible?

The Illinois case highlights several important differences in how these questions can arise. Technically, it was not an automatic injunction at all. The husband complained that his wife had moved assets while he lay ill in the hospital. The couple agreed to issuance of an injunction in the same general form as the automatic injunction.

Shortly after the husband’s hospitalization, someone (apparently not him) had added a beneficiary designation naming the wife. Before that step, no beneficiary had been named at all. Under the IRA custodian’s rules, that meant the wife would automatically become the beneficiary. Effectively, the addition of the wife as beneficiary changed nothing.

The result of the couple’s legal dispute was not a divorce at all — though it morphed into a divorce proceeding after the initial injunction. But when the husband died eighteen months later, the couple had dismissed their divorce petition remained married.

The Illinois case also involved an IRA, which raises separate questions. In some cases, retirement account beneficiary designations follow federal law rather than state law principles. Although the reported court decision does not explain why, federal law apparently did not affect the outcome in this case. Neither was there any limitation with the IRA custodian requiring a spouse’s consent before any beneficiary designation change.

Husband changes his beneficiaries

As the case describes, the husband entered the hospital in July. His beneficiary designation was changed to name his wife (of 37 years, incidentally) ten days later, while he was hospitalized. He brought his lawsuit against his wife a week later, and the injunction was issued preventing anyone from changing assets a week after that.

The husband filed his divorce proceeding a month later. Six months after that, he changed the beneficiary designation. Another six months passed, and the divorce proceeding was dismissed — and along with it the injunction was lifted.

So was the beneficiary change permissible? After the surviving wife filed her lawsuit against the IRA custodian (and her late husband’s sons), the trial judge ruled that it was. Her lawsuit was dismissed. That dismissal was upheld by the Illinois Court of Appeals, in a 2-1 ruling by the appellate judges.

The Illinois Supreme Court agreed with the trial judge (and the Court of Appeals majority). In a unanimous decision, the state’s high court ruled that the purpose of the injunction was to “preserve the status quo”, and not to prevent all transactions. Smith v. The Vanguard Group, January 25, 2019.

What does this mean for Arizona couples with troubled marriages?

The Illinois case, of course, would not carry much weight in an Arizona court proceeding. Still, the story behind it gives a clearer picture of the kind of circumstance in which the automatic injunction might arise.

Would an Arizona divorce proceeding prevent changes in beneficiary designations, or removal of the right of survivorship in jointly owned property? Probably not, but you should talk with your divorce lawyer and/or your estate planning attorney before making changes in the midst of a divorce proceeding. Do not rely on a generalized explanation (like this one); it is not a substitute for direct legal advice.

Might the answer be different for some kinds of retirement accounts? Absolutely. Be very careful about attempting to change beneficiaries on such accounts, as the change might be ineffective.

Does the Smith case in Illinois provide any other cautionary tales? Yes, and an important one: the ability of someone to, apparently, log into the husband’s Vanguard account online and change beneficiary designations should give pause to everyone who lives in a digital world. That is, all of us.

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