Prior to his death, the decedent (Michael) and his wife (Jeanine) had divorced and entered a divorce settlement agreement (“DSA”). Under the DSA, Michael was to make a series of payments to Jeanine. Upon Michael’s death, a portion of those payments remained unpaid.
At the time of his death, Michael had U.S. Series EE Bonds naming Jeanine as the payable-on-death (“POD”) beneficiary. The bonds had not been mentioned in the DSA. After Michael’s death, Jeanine redeemed the bonds and received the proceeds.
Jeanine then made a creditor’s claim against Michael’s estate, seeking the remaining payments under the DSA. The estate filed a notice rejecting the claim, taking the position that the DSA had already been satisfied. Among other things, the estate alleged that the proceeds Jeanine had received from those bonds satisfied a portion of her DSA payments.
In response, Jeanine claimed that the bonds were separate and apart from the DSA, and that there was no evidence to dispute Jeanine’s claim that Michael intended the POD designations to survive the divorce.
The Chancery Division judge agreed with the estate and determined that the bond amounts Jeanine had received counted toward the DSA obligation, because the POD designation had been presumptively revoked upon the parties’ divorce, in accordance with New Jersey statute.
That statute provides that,
Except as provided by the express terms of a governing instrument, a court order, or a contract relating to the division of the marital estate between the divorced individuals before or after the marriage, divorce or annulment, a divorce or annulment:
- revokes any revocable:
- dispositions or appointment of property made by a divorced individual to his former spouse in a governing instrument…
N.J.S.A. 3B:3-14(a).
On appeal, Jeanine argued that the “presumptive revocation” provisions of the New Jersey statute did not apply, because that law was preempted by federal regulations.
In a published decision, the Appellate Division agreed with Jeanine. It found that a U.S. savings bond is governed by federal legislation, which provides that savings bonds are “not transferable and are payable only to the owners…” There is a federal process to make changes to a bond’s ownership, and in the event of a divorce, the Department of the Treasury will recognize a settlement agreement disposing of bonds, if the owner of the bonds takes certain steps. In this case, the DSA did not mention the bonds, and Michael did not follow any of the aforementioned federal procedures or steps to transfer ownership of the bonds.
The Appellate Division concluded that the federal regulations and case law governing bond registration, ownership, and modification requirements are in conflict with the New Jersey statute that presumptively revokes a POD designation following a divorce, and that, therefore, the federal law preempts the New Jersey law. Accordingly, it ruled that Jeanine became the sole owner of the bonds upon Michael’s death, and the Chancery Division judge had erred in concluding that the bonds should be credited toward Michael’s estate’s DSA obligation.
A copy of the published Appellate Division decision of In the Matter of the Estate of Michael D. Jones can be found here.