By Chase Duncan.
Nonprobate Transferee Liability under A.R.S. § 14-6102
A.R.S. § 14-6102(A) establishes that, except as otherwise provided by law, a transferee of a nonprobate transfer may be liable to the transferor-decedent’s probate estate for unsecured creditors’ claims. A transferee may be liable only to the extent that the probate estate is insufficient to satisfy those claims. Traditionally, nonprobate transfers include, for example, transfers of a survivorship interest in a joint tenancy, transfers of a survivorship interest in community property, pay-on-death bank accounts, and transfer-on-death investment accounts. On the other hand, federal law provides that 401(k)s cannot be reached by creditors, and Arizona law provides that the death benefit from life insurance is unreachable as well.
A.R.S. § 14-6102(I), however, carves out an exception for joint tenancy with right of survivorship (“JTWROS”) in real estate. For the purposes of § 14-6102, a nonprobate transfer refers to:
a valid transfer effective at death, other than a transfer of a survivorship interest in a joint tenancy of real estate, by a transferor whose last domicile was in this state, and to the extent that the transferor immediately before death had power, acting alone, to prevent the transfer by revocation or withdrawal and to instead use the property for the benefit of the transferor or apply it to discharge claims against the transfer[or]’s probate estate.
Thus, a transferee of a survivorship interest in a JTWROS in real estate is protected from the claims of creditors, even if the transferor’s probate estate is insufficient to satisfy those claims.
Current Confusion
In 1995, before the enactment of A.R.S. § 14-6102, Arizona recognized community property with right of survivorship (“CPWROS”) as a valid form of ownership. Simultaneously, A.R.S. § 33-431(D) established that either spouse can extinguish the right of survivorship by appropriately executing and recording an “affidavit terminating right of survivorship.” In 2001, A.R.S. § 14-6102 was enacted. Therefore, by the time the exception for JTWROS in real estate was carved out, Arizona had already recognized CPWROS for six years.
CPWROS and JTWROS are functionally similar in that the right of survivorship allows for a probate-avoiding transfer of a decedent-owner’s share to the surviving owner(s). CPWROS also yields the tax benefits of community property under 26 U.S.C. § 1014(b)(6). The structural distinction between CPWROS and JTWROS lies in the parties involved: community property ownership is held among two spouses, whereas joint tenancy ownership can be held among any number of unrelated parties. In this sense, CPWROS is just a more restrictive version of JTWROS that limits what combination of parties can validly own the property in that form.
However, Arizona law does not currently treat CPWROS as under a broader umbrella of JTWROS. Arizona statutes use precise language regarding these two distinct forms of property ownership. For example, A.R.S. § 33-431(D)-(E) separately provides the necessary procedure to extinguish a right of survivorship for each form of ownership and the slightly different results of such termination, despite maintaining identical execution and recording requirements for termination.
A.R.S. § 14-6102(I) becomes confusing when considering the two ownership forms’ functional similarity alongside the timeline of enactment. JTWROS and CPWROS similarly promote the protection of real property for a surviving owner, and CPWROS already existed when the Arizona legislature created the JTWROS-in-real-estate carveout in A.R.S. § 14-6102(I) for protection from unsecured creditors. However, CPWROS in real estate is not explicitly protected by the statute from those same creditors.
Meanwhile, the transfer of the right of survivorship in CPWROS may be deemed a nonprobate transfer subject to liability for creditors’ claims under A.R.S. § 14-6102(I). Such a transfer is (1) a valid transfer effective at death, (2) other than a transfer of a survivorship interest in a joint tenancy of real estate, (3) by a transferor whose last domicile was in Arizona. However, depending on the subject property, (4) the transferor-spouse immediately before death may not have had the power, acting alone, (4a) to prevent the transfer by revocation or withdrawal and (4b) to instead use the property for the benefit of the transferor or apply it to discharge claims against the transferor’s probate estate.
Under A.R.S. § 33-431(D), a predeceased spouse had the power acting alone to prevent transfer by termination (i.e., revocation) of the right of survivorship; however, under A.R.S. § 25-214(C) that predeceased spouse could not have separately disposed of community property in real estate (now without the right of survivorship) because joinder of spouses is required for such disposal. On the other hand, if the CPWROS was in personal property, joinder of spouses is not required for unilateral disposal, so that CPWROS transfer would be a “nonprobate transfer” under A.R.S. § 14-6102(I), subject to liability to the estate for creditor claims.
Ultimately, the current statutory language suggests that the survivor of two friends who own real estate as a JTWROS receives this nonprobate transfer free from liability for creditor claims, whereas the survivor of two spouses who own real estate as CPWROS experiences uncertainty under the statute—as interpreted above, A.R.S. § 14-6102(I) only applies to CPWROS in personal property, and does not address CPWROS in real estate—and thus may not receive the same creditor protection benefits.
Other Approaches
A.R.S. § 14-6102 adopts Uniform Probate Code (“UPC”) § 6-102. Comment 5 to this section explains that “real estate joint tenancies have served for generations to keep the share of a couple’s real estate owned by the first to die out of probate and away from estate creditors.” This intent is also what CPWROS effectively achieves—keeping a couple’s real estate available to the survivor.
Furthermore, California (a non-UPC jurisdiction) has chosen to treat JTWROS and CPWROS the same for the purposes of creditor protection. California Civil Code § 682.1(a)(1) explains that CPWROS, “upon the death of one of the spouses, pass[es] to the survivor, without [probate] administration . . . subject to the same procedures, as property held in joint tenancy.” As a California appellate court explained in Dang v. Smith, 190 Cal. App. 4th 646, 660 (2010), the right of survivorship causes the “decedent’s title [to be] extinguished, and with it any interest to which his judgment creditor’s lien had attached,” ultimately permitting the survivor to succeed “to the whole property ‘free and clear of the judgment lien.’” Therefore this procedure entitling the survivor to creditor protection for JTWROS also applies to CPWROS.
Should Arizona Follow Suit?
The intent of UPC § 6-102 and the fact that California already treats JTWROS and CPWROS similarly for the purposes of creditor protection highlight that the two forms of ownership should be treated the same in Arizona, at least for the purposes of creditor protection. Accordingly, the Arizona Legislature should provide an explicit carveout for CPWROS in real estate alongside what already exists in A.R.S. § 14-6102(I) for JTWROS in real estate. Even if the omission of CPWROS from this carveout was unintentional, Arizona practitioners would benefit from an explicit carveout rather than the current ambiguity.
The Arizona Legislature has already sought to provide protection from creditors to transfers of the survivorship interest in a joint tenancy in real estate, fostering the UPC’s goal to keep a couple’s real estate available to the survivor. It is consistent with that protective sentiment to explicitly extend that protection to transfers of the survivorship interest in real estate for functionally-similar CPWROS.
