ESTATE OF DAVIS

Citation Codes

Equivalent Citations

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Docket Number

Docket No. A024159.

Attorney(S)

COUNSEL David J. Van Dam, Weltin Van Dam, Robert Lyle, Robinson, Lyle, BeLaustegui Robb and Gloria M. Petroni for Claimant and Appellant. Charles A. Wood, Jr., and Tinning DeLap for Claimant and Respondent.

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Smart Summary

Factual and Procedural Background

Decedent Myrl B. Davis retired in 1979 and established two custodial Individual Retirement Accounts (IRAs) funded by retirement and profit-sharing accounts from his employer, naming respondent James M. Davis as beneficiary. Decedent died from injuries sustained in an accident involving appellant Margaret Lee Wark, who was a judgment creditor of the decedent’s estate. After decedent’s death, appellant filed a creditor's claim against the estate, which was rejected, leading to a personal injury action. During litigation, appellant succeeded in replacing the personal representative with a special administrator, who petitioned to have the IRAs transferred to the estate as assets. The court denied this petition, reinstated respondent as personal representative, and found that the IRAs were not estate assets but passed to the named beneficiary. Appellant obtained a judgment against the estate, with a substantial portion unsatisfied.

Legal Issues Presented

Whether individual retirement accounts (IRAs) become assets of the decedent’s estate subject to creditor claims upon the decedent’s death.
Whether a custodial IRA constitutes a trust under California law or the Internal Revenue Code for purposes of probate administration.
The effect of naming a beneficiary on the vesting of title to IRAs upon the decedent’s death.
The relevance of federal estate tax considerations to the characterization of IRAs as estate assets.

Arguments of the Parties

Appellant's Arguments

Appellant contended that the IRAs should be considered assets of the decedent’s estate, thus subject to creditor claims and probate administration.
Appellant argued that the IRAs were trusts and therefore part of the estate.
Appellant asserted that the IRAs are subject to federal estate tax, implying their inclusion in the estate assets.

Respondent's Arguments

Respondent argued that IRAs do not become estate assets but pass directly to the named beneficiary upon the decedent’s death.
Respondent maintained that a custodial IRA is not a trust under California probate law, despite Internal Revenue Code language treating it as a trust solely for tax purposes.
Respondent emphasized that title to the IRAs vested in him as beneficiary by donative transfer upon decedent’s death.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Security-First Nat. Bk. v. Pierson (1934) 2 Cal.2d 63	General rule that assets are not exempt from creditor claims unless statute provides otherwise.	Confirmed that creditor claims generally attach to estate assets absent statutory exemption.
Lewis v. O'Brien (1967) 248 Cal.App.2d 628	Judgment against estate payable only out of estate assets, no lien or priority.	Supported that creditor claims must be paid from estate assets in due course of administration.
Estate of Dow (1957) 149 Cal.App.2d 47	Same principle as Lewis regarding judgment claims against estates.	Reinforced that judgments against estates do not create liens or priority over estate assets.
Estate of Adams (1957) 148 Cal.App.2d 319	Definition of "estate" in probate as encompassing all assets and liabilities.	Clarified scope of estate property for probate purposes.
Henderson v. Fisher (1968) 260 Cal.App.2d 218	Property held under express or constructive trust is not estate asset.	Distinguished IRAs from trusts, supporting exclusion from estate assets.
Reagh v. Kelley (1970) 10 Cal.App.3d 1082	Custodial IRA not an express trust due to lack of intent to create trust.	Supported that IRAs are not trusts under probate law.
Martin v. Kehl (1983) 145 Cal.App.3d 228	Custodial IRA not a constructive trust absent wrongful acquisition.	Confirmed no constructive trust arises over IRAs here.
Home Escrow etc. Corp. v. County of L.A. (1957) 155 Cal.App.2d 335	Bank-depositor relationship is debtor-creditor; bank pays only to depositor or authorized persons.	Supported that IRAs pass to named beneficiary, not estate.
Ogborn v. Bank of America T. S. Co. (1938) 28 Cal.App.2d 565	Same principle as Home Escrow regarding bank-depositor obligations.	Reinforced that IRAs do not become estate assets.
Estate of Welfer (1952) 110 Cal.App.2d 262	Law of descent and distribution does not apply to custodial accounts payable to named beneficiaries.	Confirmed that IRAs pass outside probate estate.
Estate of MacMillan (1954) 43 Cal.2d 437	If estate named beneficiary, IRA passes to heirs subject to debts and administration.	Distinguished scenario where estate is beneficiary from this case’s facts.
Estate of Johnson v. C.I.R. (5th Cir. 1983) 718 F.2d 1303	Federal estate tax treatment requires reference to state property law for nature of interest.	Clarified federal tax considerations do not control probate asset characterization.
Estate of Johnston by Payne v. United States (N.D.Tex. 1984) 586 F. Supp. 500	State law may not always control federal estate tax treatment.	Noted but distinguished for purposes of this probate decision.

Court's Reasoning and Analysis

The court began with the general principle that assets are subject to creditor claims unless exempted by statute. It examined California probate code provisions establishing that creditor judgments against an estate are payable only out of estate assets and do not create liens or priority. The court considered whether the IRAs constituted part of the estate assets. It found that although the Internal Revenue Code treats IRAs as trusts for tax purposes, this does not translate to a trust under probate law because there is no intent to create a trust and no wrongful acquisition of property. The IRAs were established as custodial accounts with respondent named as beneficiary, and title vested in him upon decedent’s death by donative transfer, not as estate assets. The bank-depositor relationship and contract law principles confirmed that the IRAs pass directly to the named beneficiary rather than forming part of the probate estate. The court rejected appellant’s argument regarding federal estate tax treatment as irrelevant to the probate characterization of the IRAs. Ultimately, the court affirmed the order denying the transfer of IRAs to the estate, holding that the IRAs are not estate assets subject to creditor claims.

Holding and Implications

The court affirmed the trial court’s order denying the petition to transfer the IRAs to the estate.

The direct effect of this decision is that the IRAs pass outside the probate estate to the named beneficiary and are not subject to creditor claims against the decedent’s estate. The opinion clarifies that custodial IRAs are not trusts under California probate law despite their tax treatment as trusts under the Internal Revenue Code. The court did not establish new precedent beyond applying existing statutory and case law principles to the facts before it.

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Estate of MYRL B. DAVIS, Deceased. A.F. BRAY, JR., as Special Administrator, etc., Petitioner and Respondent, v. JAMES M. DAVIS, as Personal Representati

OPINION

LOW, P.J.

(1a) Upon the death of the depositor, an individual retirement account does not become an asset of the decedent's estate subject to the claim of a judgment creditor, but passes to the named beneficiary.

Appellant Margaret Lee Wark, a judgment creditor of decedent Myrl B. Davis, appeals from the court's order denying a special administrator's petition for an order directing respondent James M. Davis, decedent's son and personal representative, to transfer $176,739 in two individual retirement custodial accounts (IRAs) to decedent's estate. The court found that the IRAs should be paid to respondent as the named beneficiary and are not assets of the probate estate. We affirm.

Decedent retired on January 31, 1979, and received $109,945.22 from a retirement account maintained by his employer and $68,357.49 from a deferred profit-sharing account. He made no contributions to either of these accounts. Decedent used these funds to establish two custodial IRAs; he named respondent beneficiary in the event of his death before full distribution of these accounts. In August 1979, decedent was involved in an automobile-motorcycle accident with appellant; he died on August 30, 1979, as a result of his injuries. Respondent was named his personal representative on October 25, 1979. Appellant, who also had been injured in the accident, filed a creditor's claim that respondent rejected. Appellant then filed a personal injury action against respondent in his capacity as decedent's personal representative. While that action was pending, appellant unsuccessfully sought a preliminary injunction to enjoin respondent from using the IRAs. She was successful, however, in removing respondent as a personal representative and replacing him with a special administrator. The special administrator concluded that the IRAs were estate assets and filed a petition on March 28, 1983, for an order directing their transfer. Respondent was reinstated as personal representative when the court denied the petition. Appellant ultimately obtained a judgment against decedent's estate for approximately $300,000, of which more than $150,000 remains unsatisfied.

(2) The general rule is that assets are not exempt from the claims of creditors unless specifically exempted by statute. (See Security-First Nat. Bk. v. Pierson (1934) 2 Cal.2d 63, 65 [ 38 P.2d 784].) Code of Civil Procedure section 686.020 states that "[a]fter the death of the judgment debtor, enforcement of a judgment against the judgment debtor is governed by the Probate Code." (3) Probate Code section 730 provides that a money judgment rendered against the estate of an intestate is a claim to be paid in the due course of administration; it does not create any lien on real property, cannot be enforced by execution and does not give the judgment creditor any priority of payment. A judgment against an estate is only payable in the due course of administration out of the assets of the estate. ( Lewis v. O'Brien (1967) 248 Cal.App.2d 628, 631 [ 56 Cal.Rptr. 749]; Estate of Dow (1957) 149 Cal.App.2d 47, 59 [ 308 P.2d 475].)

(4) While the word "estate," when used in the context of probate proceedings, encompasses the totality of the decedent's assets and liabilities ( Estate of Adams (1957) 148 Cal.App.2d 319, 323 [ 306 P.2d 623]), property held by the decedent under an express or a constructive trust is not an asset of his estate. ( Henderson v. Fisher (1968) 260 Cal.App.2d 218, 220 [ 66 Cal.Rptr. 896].) (5), (6) A custodial IRA is not an express trust because there is no intent to establish a trust (see Reagh v. Kelley (1970) 10 Cal.App.3d 1082, 1089 [ 89 Cal.Rptr. 425] ), and is not a constructive trust because there is no evidence of wrongfully acquired property (see Martin v. Kehl (1983) 145 Cal.App.3d 228, 237 [ 193 Cal.Rptr. 312]).

In arguing that a custodial IRA is a trust, respondent interprets the Internal Revenue Code of 1954, section 408 too broadly. Section 408(a) defines an "individual retirement account" to mean a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries which meets specified requirements. For the purpose of deferred taxation, "a custodial account shall be treated as a trust if the assets of such account are held by a bank . . . and if the custodial account would, except for the fact that it is not a trust, constitute an individual retirement account described in subsection (a)." (§ 408(h) of the Int.Rev. Code of 1954, italics added.) The court's finding that the IRAs be treated as trusts is limited to Internal Revenue Code section 408's purpose of tax deferment. (1b) An IRA is not a trust created by will or a trust to be entirely administered as part of the estate (cf. Prob. Code, §§ 1138-1138.14).

By naming respondent as beneficiary of both IRAs, consistent with section 408 of the Internal Revenue Code of 1954 and the bank agreements, title vested in respondent upon decedent's death. Since respondent paid no consideration, his designation as beneficiary can be deemed a donative transfer which became complete upon the death of decedent. Respondent was also a third party beneficiary of the individual contracts that were created when decedent deposited his funds into the bank accounts. (7) On the deposit of funds in a bank, the relation between the bank and depositor is that of debtor and creditor; the contract of the bank is to pay the money deposited only to the depositor or to persons duly authorized by the depositor. (See Home Escrow etc. Corp. v. County of L.A. (1957) 155 Cal.App.2d 335, 338 [ 317 P.2d 1021]; Ogborn v. Bank of America T. S. Co. (1938) 28 Cal.App.2d 565, 569 [ 83 P.2d 44].) The proceeds of such transfers do not become a part of the estate: (8) "[T]he law of descent and distribution has no applicability to such cases. [Citations.]" ( Estate of Welfer (1952) 110 Cal.App.2d 262, 265 [ 242 P.2d 655].) Had decedent named his estate as the beneficiary, as allowed by Treasury Regulation section 1.408-2(b)(8), title would have vested in his heirs subject to expenses of administration and payment of his debts. ( Estate of MacMillan (1954) 43 Cal.2d 437, 442 [ 274 P.2d 662].)

Appellant's argument that the IRAs are subject to federal estate tax has no relevance here. (9) For the purposes of the federal estate tax, courts must look to state property law to determine the nature of decedent's interest in the property, and to federal law for the nature of the tax, manner or method of its computation and liability for payment. (See Estate of Johnson v. C.I.R. (5th Cir. 1983) 718 F.2d 1303, 1312; but see Estate of Johnston by Payne v. United States (N.D.Tex. 1984) 586 F. Supp. 500, 503 [state law not controlling].) (10) Such tax liability is not determinative of the assets in a decedent's estate since it can be imposed on property that is excluded from probate administration, including revocable trusts, joint tenancy property and life insurance proceeds. (See §§ 2038, 2040, 2042 of the Int.Rev. Code of 1954.)

The court's order is affirmed.

King, J., and Haning, J., concurred.

Appellant's petition for review by the Supreme Court was denied December 19, 1985. Reynoso, J., was of the opinion that the petition should be granted.