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If you’re a trusts and estates lawyer, a larger and larger share of your practice is going to have little — if anything — to do with our probate code. Why? Think: non-probate revolution. In today’s world most inherited wealth is transferred from one generation to the next by non-probate transfers, which are not subject to probate, are not governed by a person’s will, and are not subject to challenge under our probate code.

Adapt or Perish

Take for example life insurance policies, a classic example of a non-probate transfer. Vast sums are controlled by these contracts, most of which will never see the light of day in a probate proceeding. According to the latest ACLI statistics, as of year-end 2013 there was $19.7 trillion of life insurance in force in the U.S. and payments that year totaled $107 billion. Trusts and estates litigators who don’t adapt to this dramatically changing legal landscape risk becoming irrelevant.

So what’s to be done? Think transferable skills. Apply the professional experience you’ve developed litigating traditional probate disputes to the non-probate arena. And we do that by learning to prosecute legitimate inheritance grievances in non-traditional forums (such as federal court, a growing trend) involving creative legal arguments that work with non-probate assets (like insurance policies). That’s exactly what happened in the linked-to case above.

Case Study

Kowalski v. Jackson Nat. Life Ins. Co., 2013 WL 5954380 (S.D.Fla. November 07, 2013)

At the heart of this case is a $175,000 life insurance policy on a mother’s life (the “Insured”) bought and paid for by her son (Edward Kowalski) and his wife (Lisa Kowalski, who’s referred to as “Kowalski” in the court’s order). Edward, the sole owner and beneficiary of the life insurance policy, predeceased his mother. After her husband died, Kowalski did everything she was supposed to do under the terms of the life insurance contract to transfer the policy’s ownership to herself, but for reasons unexplained in the court’s order she didn’t follow up on changing the beneficiary designation to herself as well. When mom died, the insurance policy proceeds automatically defaulted to son Edward’s estate — NOT Kowalski. The beneficiaries of Edward’s estate (the “Estate”) apparently included a woman named “Wilson” who wasn’t about to walk away from her share of the life insurance money. To resolve this dispute, Kowalski sued the insurance company, Jackson Nat. Life Ins. Co. (“Jackson”), in federal court seeking a declaratory judgment reflecting that she was the life insurance policy’s sole owner and beneficiary.

Unjust enrichment claim — succeeds

The key argument addressed in the court’s order was Kowalski’s unjust enrichment claim against the Estate. Did it work? Yes! Here’s why:

[T]o establish a claim for unjust enrichment, Kowalski must establish that she: (1) conferred a benefit on the Estate, which had knowledge of the benefit; (2) the Estate voluntarily accepted and retained the benefit; and (3) under the circumstances, it would be inequitable for the Estate to retain the benefit without paying for it. See Shands Teaching Hosp. & Clinics, Inc. v. Beech St. Corp., 899 So.2d 1222, 1227 (Fla.Dist.Ct.App.2005). Because the Court concludes that the undisputed record establishes each of these elements, the Court will grant summary judgment for Kowalski on her claim for unjust enrichment.

First, the Court finds that Kowalski conferred a benefit on the Estate which had knowledge of the benefit. . . . [T]he benefit conferred on the Estate is the policy proceeds themselves. . . . The undisputed record before the Court further reflects that Kowalski, and her husband, Edward Kowalski, were the sole source of the premium payments which led to the payment of the policy proceeds. . . . Indeed, the Insured herself confirmed in a conversation with a Jackson representative that Lisa Kowalski was paying the premiums. Transcript of July 18, 2010 Call [DE 126–10] at 2 (“my daughter-in-law pays the insurance on my life-but she’s not listed as the beneficiary yet.”); 5 (“I said, You’ve been paying on it, but I don’t think you have the ownership on it.”).

Second, the undisputed record further establishes that the Estate has accepted this benefit. This is evidenced by Wilson’s participation in this litigation as personal representative of the Estate.

Third, the Court finds that under the circumstances it would be inequitable under for the Estate to retain the policy proceeds without having contributed anything towards payment of the policy premiums. . . . To allow the Estate to retain the policy benefits would represent a windfall to the Estate when the undisputed record before the Court reflects that none of the Insured’s heirs contributed anything to the payment of the policy premiums. See Sharp, 511 So.2d at 365. . . . Thus, it would be inequitable for the Estate to retain the policy proceeds. Because Kowalski has established all the elements of unjust enrichment, the Court will grant summary judgment for Kowalski on this claim.

In most disputes involving life insurance proceeds, the terms of the contract control — no matter how unfair the outcome or counter to the policy owner’s testamentary intent. Which means a standard unjust enrichment claim is usually going nowhere in a life insurance case. Where this problem came up most often in the past was in the post-divorce context. A couple would divorce, but one of them would forget to change his or her life-insurance beneficiary designation forms, often resulting in an unintended windfall for the surviving ex-spouse. If someone tried to challenge these obvious mistakes in court, they’d inevitably lose (see here). Eventually Florida passed a post-divorce statutory fix (see here).

This isn’t a post-divorce case, so the statutory fix doesn’t apply. Because there’s a contract in place here, that should have been the end of the unjust-enrichment claim. But it wasn’t. Why not? If you litigate inheritance disputes, this is the single most important question raised by this case.

Contract defense — fails

The default proposition is that Florida law bars unjust enrichment claims in cases involving parties to a contract:

Wilson asserts that the existence of the insurance policy bars any claim for unjust enrichment. . . . Florida courts have held that contracts barring the unjust enrichment claim must be between the parties to the unjust enrichment claim. See, e.g., Moynet v. Courtois, 8 So.3d 377, 379 (Fla.Dist.Ct.App.2009) (“[W]here there is an express contract between the parties, claims arising out of that contractual relationship will not support a claim for unjust enrichment.”); Diamond “S” Dev. Corp. v. Mercantile Bank, 989 So.2d 696, 697 (Fla.Dist.Ct.App.2008) (same); Shands Teaching Hosp. & Clinics, Inc., 899 So.2d at 1227 (same).

The defense didn’t apply in this case because the person whose life was insured — was not a party to the insurance policy contract. And just because the Insured signed a statutorily-required written consent to the policy, doesn’t mean she’s a party to the contract. And if the Insured wasn’t a party to the contract, her Estate isn’t either.

The Court agrees with Kowalski that the Insured was not a party to the insurance policy. Although the Insured did sign the insurance policy application, as Kowalski points out, her consent was required under Florida law for her son, Edward, to obtain a policy on her life. (Fla. Stat. § 627.404(5)). The policy itself is clear that all rights under the policy belong to the Owner: “[w]hile the Insured is living, all rights of this Policy belong to the Owner.” . . . Edward Kowalski is listed as the applicant/owner on the insurance policy application. . . . Thus, there is no support for the proposition that the Insured was a party to the insurance policy.

Third-party beneficiary defense — fails

OK, so the Estate wasn’t a direct party to the insurance contract, but was it a party by implication? In other words, was the Estate a third-party beneficiary of the contract? In the law of contracts a third-party beneficiary is a person who may have the right to sue on a contract, despite not having originally been an active party/signatory to the contract.

In this case the insurance policy proceeds had been paid by default to the Insured’s Estate. Did this make the Estate a third-party beneficiary of the insurance contract? Answer: NO. Even though the Estate obviously “benefited” from the contract (it received the insurance proceeds), the Estate wasn’t a “contractual” third-party beneficiary in the sense that would apparently preclude an unjust-enrichment claim. Here’s why:

There is also no evidence that the Estate or the Insured is a third party beneficiary under the policy. Under Florida law, “[t]he beneficiary has no beneficial interest or right in the policy or to the proceeds. The beneficiary possesses only an expectancy during the insured’s life.” Ross v. Ross, 20 So.3d 396, 398 (Fla.Dist.Ct.App.2009) (citing Pendas v. Equitable Life Assurance Soc’y, 129 Fla. 253, 176 So. 104 (1937); Lindsey v. Lindsey, 342 Pa.Super. 72, 492 A.2d 396, 398 (1985) (“the naming of a beneficiary on a life insurance policy vests nothing in that person during the lifetime of the insured; the beneficiary has but a mere expectancy”)). Moreover, to be considered a third party beneficiary under a contract, “a party must demonstrate that the agreement to be enforced shows a clear intent and purpose on the part of the contracting parties that one of them should become the debtor of a third. One who benefits only indirectly from the provisions of a contract made by others for their own benefit, and not for the benefit of such third party, cannot maintain an action upon the contract.” Deanna Constr. Co. v. Sarasota Entm’t Corp., 563 So.2d 150, 151 (Fla.Dist.Ct.App.1990) (citations omitted). “[A] party claiming third party beneficiary status must be shown to be a direct and intended beneficiary of the agreement, not merely an incidental beneficiary; that in order to find the requisite intent to entitle a party to sue as a third party beneficiary, it must be shown that both contracting parties agreed to benefit the asserted third party.” Id. Here, the Estate is only an incidental beneficiary to the policy because the named beneficiary, Edward Kowalski, predeceased the Insured. Thus, the existence of the insurance policy does not preclude Kowalski’s claims against the Estate, a non-party to the contract.

Unilateral mistake defense — fails

Having struck out on its contract defenses, the Estate then argued you can’t prosecute an unjust-enrichment claim when it’s your own mistake that caused the problem. Kowalski argued the insurance company bore some of the fault for the beneficiary-designation form never having been changed after her husband’s death. The court didn’t buy it. According to this judge, the only party that made a mistake was Kowalski — but it didn’t matter. Even if the Estate’s unjust enrichment was due solely to Kowalski’s unilateral mistake, the Estate doesn’t get to keep the loot.

Florida courts have permitted unjust enrichment claims based upon the unilateral mistake of one of the parties to stand where the other party received an undeserved windfall. See Sharp v. Bowling, 511 So.2d 363, 365 (Fla.Dist.Ct.App.1987) (relying upon unjust enrichment to force an employee to reimburse her employer for moneys the employer had to pay the IRS as a result of an error in reporting the amount of federal income taxes withheld from the employee’s wages. Although the mistake had been a unilateral one made by the employer, the employee, who had received a tax refund from the IRS as a result of the mistake, was unjustly enriched and “[i]n equity and good conscience … should be required to reimburse her employers.”).[FN6]

[FN6.] Wilson attempts to distinguish Sharp on the grounds that Kowalski does not seek the premiums erroneously paid, but rather the full contract amount. . . . The Court does not find this distinction meaningful because it ignores the fact that the Estate, like the employee in Sharp, will receive a windfall in the amount of the policy proceeds, not the premiums paid.

Lesson learned?

Times have changed. Today, life insurance and other beneficiary-designated non-probate assets such as annuities, pay-on-death accounts, joint accounts and retirement planning accounts have become the dominant wealth transfer mechanism for most middle class families (wills and trusts remain prevalent  for the top 1%). This is the single most significant paradigm shift shaping the day-to-day reality of most trusts and estates lawyers and their clients (not the latest incarnation of our federal transfer-tax system, which impacts only the wealthiest 0.14% of Americans — fewer than 2 out of every 1,000 people who die). Cases like the one linked-to above are excellent examples of what more and more inheritance disputes may look like in the future. We ignore them at our peril.