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JOHN WESLEY BAYS APPELLANT
ON REVIEW FROM COURT OF APPEALS
V. CASE NO. 2012-CA-002218-MR
KNOX CIRCUIT COURT NOS. 07-CI-00371, 07-CI-00631 AND
09-CI-00246
KRISTIE D. KIPHART, INDIVIDUALLY AND AS
TRUSTEE OF THE DEMAND RIGHT
IRREVOCABLE TRUST FOR BRYCE A. BAYS APPELLEE
OPINION OF THE COURT BY JUSTICE NOBLE
AFFIRMING
This case presents the question whether a dying spouse's decision to
remove the surviving spouse as a life-insurance beneficiary and to name
someone else can constitute fraud on the surviving spouse's statutory elective
share. Like the Court of Appeals, this Court concludes that it cannot.
I. Background
John Wesley Bays and Carole Kiphart married in 2000. They had one
child, Bryce Bays. In 2001, John and Carole executed reciprocal wills. Carole
was a physician and had a substantial income.
In 2000, Carole obtained a life-insurance policy through Prudential
Insurance Company for $125,000. Her husband was initially named as a
beneficiary of this policy, but little else is known about it. Presumably, it is
standard term life insurance.
In January 2002, she also obtained a $750,000 policy from American
General Life Insurance Company, with the benefits payable 80% to her
husband and 20% to her son. Although this policy was generally a term life
policy (with a thirty-year term), it had two facets that set it apart from ordinary
term-life insurance. First, it was a return-of-premium policy, meaning that at
the end of the term, if Carole lived, all of her premiums would be returned to
her. Under this provision, the policy built up a cash value over time, and could
be surrendered in exchange for this cash value. The cash value did not build
up linearly, representing the full value of the premiums from the beginning.
Instead, it had no cash value for its first five years, with a cash value beginning
to accrue at the end of the sixth year. Even then, the cash value was
substantially less than the premiums paid. The cash value was not to equal the
premiums paid until the end of the thirty-year term. (Carole would die shortly
before the end of the sixth year of the policy, that is, five years and ten months
into the policy.)
The policy also included a terminal-illness accelerated benefit rider.
Under that provision, if Carole was diagnosed with a terminal illness and was
expected to die within twelve months, she could call up to 50% of the proceeds
of the policy, to a maximum of $250,000. Exercising this option would have
reduced the benefit payable on her death to any named beneficiary.
Carole was diagnosed with cancer in December 2006. Despite this
diagnosis, Carole never invoked the terminal-illness acceleration rider on her
American General Policy.
2
In September 2007, Carole was admitted to the Markey Cancer Center in
Lexington, Kentucky. While there, and without John's knowledge, she executed
a new will that largely disinherited her husband. She had relatively liquid
assets (such as a certificate of deposit for more than $90,000, multiple bank
accounts, and a retirement account) and other valuable personal property
(such as horses), with a combined value of over $150,000. Nonetheless, she
mostly left John only personal and household effects in the new will. The will
also purported to "bar ... dower and all statutory marital rights he may have in
[her] estate." The will included a holographic codicil disposing of the bulk of the
estate, with many specific bequests of cash, horses, a truck, and other
property, largely to members of Carole's family.
Around the same time, Carole also created two trusts, the Demand Right
Irrevocable Trust for Bryce A. Bays and the Carole Kiphart Bays Living Trust.
At that time, she removed John and Bryce' as beneficiaries on the life-
insurance policies, and instead named the trusts as the beneficiaries. The
American General policy's proceeds were to be paid into the Demand Right
Irrevocable Trust, and the Prudential policy's proceeds were to be paid into the
Living Trust.
Carole died on October 28, 2007. In November 2007, Carole's September
2007 will was admitted to probate, and her sister, Kristie Kiphart, was
appointed executrix of the estate under the September 2007 will. Kristie was
also trustee of both trusts. She invested the proceeds of the American General
1 The Prudential policy's beneficiary had already been changed earlier in 2007
to Bryce Bays.
policy with Raymond James 86 Associates, and the proceeds of the Prudential
policy were paid into the Knox Circuit Court Clerk, under an agreed order.
John quickly began challenging what had occurred. In December, he
renounced the will under KRS 392.080, and instead elected to take his spousal
share under KRS 392.020. He also filed a declaration of rights action with
respect to the will, seeking to recover the portion of his spousal share that may
have been delivered to various legatees under the will and to the beneficiaries
of the life insurance policies. His primary theory was that there was fraud on
his statutory spousal interest because the beneficiaries of the insurance
policies had been changed and the trusts established without his knowledge or
consent, and the policies (and their proceeds) were part of Carole's estate.
In 2008, John also filed a separate action to recover money that he
claimed was missing from a safe-deposit box he had shared with his wife. And
in 2009, he sued to have the September 2007 will declared void because it was
not executed in accordance with KRS 394.040. The Knox Circuit Court
consolidated all three actions.
The circuit court held in John's favor with respect to the will, declaring it
void. The will itself proclaimed that it had been executed in Louisville, although
there is no question that Carole signed it in Lexington. Additionally, one of the
witnesses did not actually see Carole sign the will and, instead, later signed as
a witness in Louisville, as did the notary who certified the signatures. Thus, the
will clearly failed to meet the requirements of KRS 394.040, which states that a
non-holographic will is valid only if the testator signs the will "in the presence
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of at least two (2) credible witnesses, who shall subscribe the will with their
names in the presence of the testator, and in the presence of each other."
The other claims were decided in a bench trial in 2011. The circuit court
denied John's claim about the cash that he claimed was supposed to be in the
safe-deposit box, concluding there was insufficient evidence. But the court
found in John's favor with respect to the claimed fraud on his statutory
spousal interest. Specifically, the court found that John did not know or
consent to the changes of insurance-policy beneficiaries or the creation of the
trusts to be funded with the proceeds of the policies. And the court concluded
that those were "fraudulent [inter] vivos transfers." Moreover, the court held
that the insurance policies were personalty to be considered in calculating
John's share of his wife's estate. (By statute, he is entitled to one half of all
surplus personalty after renouncing the will.) Based on this, the court entered
judgment in John's favor for $454,093.38, plus interest. This amount
represented one half of the insurance proceeds and other property that was
part of Carole's estate at the time of her death after an off-set representing the
ownership interests of John and Bryce in some of those assets.
The Court of Appeals, by a split vote, reversed and remanded. The court
concluded that a surviving husband's statutory spousal interest does not
attach to the proceeds of life insurance because they are never part of the
decedent's estate. Instead, all the decedent ever owned was the insurance
policies themselves, which are separable from any benefits payable on death.
The court noted that to hold otherwise would "create chaos in the realm of
estate planning" and "would also place insurance companies in an untenable
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position of honoring the contract of an insured in the face of a dower or curtesy
claim by a surviving spouse." The court also noted that Carole, as the owner of
the insurance policies, had an absolute right to change the beneficiaries of
those policies without John's knowledge or consent.
John sought discretionary review, which this Court granted.
II. Analysis
A surviving spouse is generally entitled, by law, to a share of a dead
spouse's estate. That share includes a portion of the dead spouse's real estate,
the amount of which depends on whether there is a will that the surviving
spouse elects against, and, in every case, "an absolute estate in one-half (1 / 2)
of the surplus personalty left by the decedent." KRS 392.020. At common law,
this share, or some version of it, was called dower (for widows) and curtesy (for
widowers). 2 That share cannot be defeated even by a will excluding the
surviving spouse and disposing of all the decedent's estate. See KRS 392.080
(allowing the surviving spouse to renounce the will and claim the statutory
share, albeit at a reduced level with respect to real estate).
Nevertheless, dying spouses sometimes attempt to defeat the surviving
spouse's statutory share by disposing of property prior to death through inter
2At common law, the rights differed. Dower was a one-third right the widow
had in the deceased husband's real estate, whereas curtesy was a right to all of the
deceased wife's real property, if children were born of the marriage. Both interests
were life estates, rather than fee estates. Compare Black's Law Dictionary (10th ed.
2014) (definitions of dower), with id. (definition of curtesy).
Given the modern departure from these common-law interests, the share is
better referred to as a statutory spousal share, or some variation of that term, instead
of the traditional terms. Since it can be taken in lieu of a bequest in a will, where the
surviving spouse elects against or renounces the will, it is often called an elective
share.
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vivos transfer of assets to third parties. The schemes used in such attempts
range from simple transfers of cash, Benge v. Barnett, 217 S.W.2d 782, 782
(Ky. 1949); Martin v. Martin, 138 S.W.2d 509, 511 (Ky. 1940), to more complex
deals, such as purchasing real estate in the name of another person, Rowe v.
Ratliff 104 S.W.2d 437, 438 (Ky. 1937), or placing cash into joint accounts
with third parties, Harris v. Rock, 799 S.W.2d 10, 11 (Ky. 1990).
Such attempts, when directed to defeating the surviving spouse's share
rather than constituting bona fide gifts, are deemed fraudulent. And this Court
and its predecessor have repeatedly stated that such attempts are improper
and may be unwound, at least to the extent needed to fund the surviving
spouse's share. See Harris, 799 S.W.2d at 11; Martin, 138 S.W.2d at 515;
Benge, 217 S.W.2d at 784; Rowe, 104 S.W.2d at 439. The rule, stated simply
(and traditionally), is that "a man may not make a voluntary transfer of either
his real or personal estate with the intent to prevent his wife, or intended wife,
from sharing in such property at his death and that the wife, on the husband's
death, may assert her marital rights in such property in the hands of the
donee." Martin, 138 S.W.2d at 515. Although the common-law rights
distinguished between husband and wife, the modern statute to which this rule
attaches is gender neutral, granting the same rights to both spouses, and thus
the same rule applies to a woman who attempts to defeat her husband's
spousal rights, as has been alleged in this case.
Here, the alleged fraudulent scheme consisted of changing the named
beneficiaries on a pair of life insurance policies shortly before Carole's death,
and making them payable into a pair of trusts for the benefit of her minor son.
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As noted above, the trial court concluded that these acts were "fraudulent
[inter] vivos transfers," and thus invoked the fraud rule to recapture part of the
insurance proceeds.
John makes much of this fraud finding, arguing that appellate review
should be limited to the clear-error standard as a result. The Court of Appeals
addressed this claim by concluding that "because ... the trial court erred in its
characterization of the life insurance proceeds as personalty, its finding of
fraud is unnecessary and irrelevant." John objects that in so concluding, the
Court of Appeals overlooked that his claim was one of fraud on his statutory
spousal interest, and not simply the interpretation of insurance policies in the
estate setting.
This Court disagrees. The trial court's finding is premised on a legal
conclusion: that the life-insurance policies were personalty and thus the
proceeds of the life-insurance policies were also personalty. From this, the
court reasoned that the proceeds were part of Carole's estate at the time she
died. This was a conclusion of law, not fact, and as such it is reviewed de novo.
Whether any transactions related to the proceeds may be found to be
fraudulent depends first on their being part of the decedent's property during
her lifetime. It is only if the proceeds are part of her property that a claim of
fraud becomes relevant because the surviving spouse's statutory share extends
only to property that belonged to the dead spouse during her lifetime. If the
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proceeds were not part of the dead spouse's property, a finding of fraud would
not have to be made. 3
Indeed, this case, despite the various arguments made by the parties,
turns on that simple question. Are the proceeds of a life-insurance policy
payable to a third-party beneficiary part of the decedent's property and thus
subject to the surviving spouse's statutory interest and, by extension,
recoverable by a claim of fraud on the surviving spouse's statutory share? The
answer is no.
The trial court's approach in this case confused the life-insurance
policies, which were owned by Carole, with their proceeds, which were never
owned by Carole and would never have become part of her estate. Indeed, the
trial court's reasoning in this respect depended on the conclusion that "[title
insurance policies ... are personalty of the estate." That may be true, in a
sense, but we are concerned not with the policies themselves, but with their
proceeds.
This Court's predecessor held that the proceeds of life insurance, at least
where the insured has the contractual right to change beneficiaries, cannot be
recovered as part of the surviving spouse's statutory share. See Farley v. First
Nat. Bank, 61 S.W.2d 1059, 1061 (Ky. 1933). In Farley, the decedent changed
the beneficiary from his estate, in which his wife, though estranged at the time,
would have shared, to his children, and then committed suicide. Id. at 1060.
3 The order of the trial court's conclusions illustrates this error. It first found
that the changes of beneficiaries were fraudulent inter vivos transfers, and then
concluded that the policies were part of Carole's personalty (and thus so were the
proceeds). This reverses the order in which the issues should have been analyzed.
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The wife challenged the beneficiary change as "fraud ... of [her] marital rights."
Id. at 1061. The court denied the claim, stating: "Where the right to change the
beneficiary is reserved by the insured, this right is a part of the contract from
its inception, and may be exercised by the insured at any time before his death,
for not until then does the right of the named beneficiary become vested." Id.
The Court further stated that "[t]he named beneficiary in a policy of insurance
which provided for a change of beneficiaries has no vested interest during the
life of the insured; his interest is a mere expectancy." Id.
The Court concluded that "[t]he right of the insured to make the change
is absolute unless equities have intervened, which is not the case here, and the
beneficiary cannot prevent it by objecting." Id. (emphasis added). The
soundness of this point was illustrated by the fact that "[t]he insured may
permit the policy to lapse, and no one can complain." Id. The Court further
explained its conclusion by noting:
It is an essential part of the contract that he retains control of the
policy, at least, to the extent of changing the beneficiary. Whether
the change shall be made is wholly under his control and the
manner of making it is entirely a matter between him and the
insurer.
Id.
Similarly, in National Life & Acc. Ins. Co. v. Walker, 246 S.W.2d 139, 139
(Ky. 1952), the decedent's wife was originally named the beneficiary of three
life-insurance policies, but the beneficiary was changed to the decedent's
mother. The wife in that case did not claim fraud on her marital interest, per
se, but instead claimed that the change of beneficiaries violated KRS 297.140
(now KRS 304.14-340), which makes the proceeds of any life-insurance policy
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payable to a wife part of her separate estate (and thus protected from the
husband's creditors), and allows a woman to take out a policy on her husband,
without his consent, with the proceeds again inuring only to her benefit. But
the policy in Walker still allowed the insured, the husband, to change the
beneficiary, and the evidence established that the husband was the contracting
party, not the wife. Id. at 140.
Again, the Court held "that a designated beneficiary in a policy of
insurance has no vested interest therein where the insured is authorized by the
contract to change the beneficiary at his pleasure with the consent of the
insurer." Id. Because the policy allowed the husband to change the beneficiary,
and he did so before his death, the wife "never acquired a vested right in the
proceeds which prevented the change in the beneficiary." Id. at 141.
These cases alone would appear to control the outcome of this case.
John at most had a contingent interest, and Carole retained an absolute
contractual right to change the beneficiary of her policies. Her decision to
exercise that right cannot be fraud on John's statutory interest because she
never owned the proceeds of the insurance policies. The proceeds would thus
never become part of her estate, and would instead pass outside it. 4 Even if she
intentionally acted to defeat any claim in the proceeds, such conduct would not
be fraud on John's statutory interest because that interest could never attach
to those proceeds. His interest was at best contingent, created only by Carole's
4 They would have, of course, if her estate had been named her beneficiary. But
those are not the facts of this case.
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naming him as a beneficiary, and that interest was defeated when she named
another beneficiary and subsequently died.
The trial court attempted to avoid the effect of this law by treating the
insurance policies like joint bank accounts. The court emphasized that the
larger policy had a terminal-illness acceleration rider, by which Carole could
have accessed a portion of the proceeds upon her diagnosis with a terminal
illness. Because the policy had an existing cash value of sorts, the court
reasoned, it was no different than any other property that Carole owned.
But as the Court of Appeals pointed out, the rider limited the total that
could be accessed in this manner to $250,000, far short of the full benefits to
be paid. Thus, even if the trial court was correct, only that amount could be
considered as part of Carole's personalty.
More importantly, however, even if a life-insurance policy has a cash
value, it does not attach to the decedent's estate in such a way as to give a
surviving spouse a statutory interest in it. As this Court's predecessor noted in
Farley, although a "policy of life insurance having a cash surrender value is
sometimes spoken of as property, ... it has attributes different from other forms
of property." 61 S.W.2d at 1061. Chief among those differences is that "Mire
insurance is chiefly for the purpose of creating an asset at the death of the
insured for the benefit of his estate or of a named beneficiary." Id. Again,
"[w]here the right to change the beneficiary is reserved by the insured, this
right is a part of the contract from its inception, and may be exercised by the
insured at any time before his death, for not until then does the right of the
named beneficiary become vested." Id.
12
It could be argued that the trial court's joint-account analogy was
accurate at least with respect to the $250,000 in proceeds that Carole could
have accelerated. Presumably she could have met the policy's requirements of
proving a terminal illness and thus could have exercised her rights under the
rider. Thus, she had a contractual option on $250,000 in proceeds that she
had a right to. But the trial court's analogy breaks down because Carole never
exercised her option. Unlike a joint bank account, which the decedent had
possession of during her life, Carole never had possession of the $250,000 in
proceeds.
And the statutory share is limited to "surplus personalty left by the
decedent." KRS 392.020 (emphasis added). If Carole never had those proceeds,
she could not have left them as part of her estate. This language applies
specifically to property that is possessed at the time of death. Harris, 799
S.W.2d at 11 ("Surplus personalty as used in the statute means the personalty
remaining after the payment of the debts, funeral expenses, charges of
administration, and widows exemptions have been deducted from the gross
personalty possessed by the decedent at the time of his death."). If Carole never
possessed the proceeds, then they never will pass through probate. And when a
spouse elects against a will, as John did here, that spouse is limited to the
statutory share provided in KRS 392.020.
Carole retained the right to change the beneficiaries of her policies. She
owned the policies, and decisions with respect to them belonged exclusively to
her. Similarly, the option to exercise the acceleration clause belonged solely to
Carole. John could not have forced her to exercise that option, thereby
13
converting the policy into cash, any more than he could have forced her to
continue paying the premiums on the policy if she chose to discontinue it.
Upon her death, the acceleration option evaporated and was displaced by the
insurer's obligation to pay out the policy to the named beneficiaries. The
existence of such an option was simply irrelevant until and unless Carole
exercised it. In this case, she did not. Thus, any cash value she could have
extracted from the policy never manifested and thus could not have been part
of her estate.
Moreover, for property that Carole did not possess at the time of her
death to be imputed to her estate, to be treated as surplus personalty, there
must be proof of fraud. See Harris, 799 S.W.2d at 15 ("So, how does this
property, these joint accounts, get to be surplus at death, subject to the dower
statute? It doesn't, unless there is proof someone has been defrauded."). This is
where the joint-account analog breaks down even further. There is no
suggestion of fraud with respect to Carole's failure to invoke the terminal-
illness rider. The trial court found that changing the beneficiaries on the
policies constituted fraudulent inter vivos transfers but said nothing about
Carole's failure to invoke the rider. And there is no evidence from which fraud
could be inferred. There was not, for example, evidence of an agreement
between Carole and John by which she would accelerate the proceeds to pay
for her care and thus leave the rest of her property intact for him to use after
her death. If there was such an agreement, but Carole, instead of calling the
14
rider, actually used up money in her bank accounts, a finding of fraud might
be justified. 5
In the absence of such fraud, there can be no fraud on John's statutory
share. Indeed, there is no inter vivos transfer in the first place to undo, unlike
with a true joint account, because all Carole did was decline to draw assets
into her estate while living.
Finally, we recognize that Farley qualified the otherwise absolute "right of
the insured to make the change" by noting that the situation could be different
where "equities have intervened." 61 S.W.2d at 1061. But like in Farley, that
"is not the case here." Id. John was able to renounce his wife's will and obtain
his statutory share of the property that was actually part of her estate (or
should have been). He was not completely disinherited. Moreover, the life-
insurance proceeds were not put to some seemingly improper use, such as
being paid to an adulterous paramour or to a shady con artist who had
connived his way into Carole's life. They were, instead, paid into trust for the
benefit of Carol's and John's young child, Bryce. Surely that is not the type of
scenario for which equity would give John a remedy—possibly at the expense of
his own child.
5 This also explains why the $100-million example employed by the dissent in
the Court of Appeals in this case does not undermine the rule laid out above that life
insurance proceeds are not to be treated as part of the decedent's personalty. The
dissent offered the example of a spouse With a $101-million cash estate. The spouse
has a terminal illness and spends $100 million on a one-time premium to buy a $95-
million life insurance policy payable to someone other than the surviving spouse. In
such a case, with the vast bulk of the estate being diverted at the last minute to life
insurance, atrial court would be justified in finding a fraudulent transfer. In our case,
however, the analogous transfers are the regular payments of the premiums of about
$1,300 per year. There is no reason to believe those payments were attempts to
defraud John's statutory share.
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III. Conclusion
A life-insurance beneficiary has only a contingent interest in the benefits
of the policy, and where the insured retains the right to change the beneficiary,
that right is virtually absolute. Where a dying spouse exercises that right to
remove the surviving spouse as a named beneficiary and instead names a trust
for the benefit of the minor child of the marriage, the surviving spouse cannot
claim fraud on his or her statutory spousal interest. For that reason, the Court
of Appeals is affirmed.
All sitting. All concur.
COUNSEL FOR APPELLANT:
W. Patrick Hauser
W. Patrick Hauser, PSC
PO Box 1900
Barbourville, Kentucky 40906
COUNSEL FOR APPELLEE:
Travis Alan Rossman
Rossman Law, PLLC
220 Court Square
PO Box 209
Barbourville, Kentucky 40906
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