An individual works for over twenty years. Before he marries, he designates his sister as the beneficiary of his retirement plan death benefits. Years later, he marries but never changes the beneficiary designation. When he dies, his widow claims she is entitled to a portion of the retirement benefits as community property. His sister argues the beneficiary designation controls.
This raises a dispute between two fundamental principles of Texas law. Community property law provides that property acquired during marriage belongs to both spouses. However, contract law permits individuals to designate who receives death benefits from retirement plans. So which one prevails?
The question is whether a surviving spouse can claim community property rights in retirement plan benefits when the deceased spouse designated a different beneficiary before the marriage and never changed that designation. The Sixth District Court of Appeals’ decision in In re Estate of Gibson, No. 06-17-00059-CV (Tex. App.—Texarkana Oct. 25, 2017, no pet.) (mem. op.), addresses this very question.
Facts & Procedural History
In 1989, Gibson began working for the University of Texas at Dallas. He was unmarried at the time. He designated his sister Beverly Ward as the beneficiary of any and all death benefits payable from his retirement plan with the Teachers’ Retirement System of Texas. In 2003, Gibson married Fox-Gibson. He never changed his beneficiary designation with TRS. In 2011, Gibson died intestate.
Fox-Gibson was appointed administrator of Gibson’s estate. She filed an action in the probate proceeding in her representative capacity seeking a declaration that she individually had a community property interest in the TRS plan benefits. In this probate litigation, she requested that the community property portion of Gibson’s death benefits held by TRS be paid over to her.
An initial hearing was held on January 16, 2014. Fox-Gibson testified that she married Gibson on September 26, 2003, and that he died on September 26, 2011. She testified she was the alternate payee and that the community interest was any deposits and interest made into the account after the date of their marriage. She entered into evidence certain business records concerning Gibson’s TRS plan account. Ward stated that she was the named beneficiary and that Gibson left all of the benefits to her. However, Ward also asked that Fox-Gibson be awarded the community portion. The probate court took the case under advisement.
The probate court later notified Fox-Gibson that before it could sign an order on the application, it needed to determine the heirship of Gibson. Fox-Gibson filed an application to determine heirship. While both the application and the heirship determination were pending, Ward filed her original answer asserting that the beneficiary designation executed by Gibson should control the distribution of the TRS plan benefits. Ward also filed a petition for declaratory judgment asking the probate court to declare that the beneficiary designation was effective, that the community portion of the TRS plan benefits was under Gibson’s management and control, and that Ward was entitled to all of Gibson’s separate and community property interest in the TRS plan benefits.
Fox-Gibson moved to strike Ward’s petition, asserting it was untimely under Rule 63 of the Texas Rules of Civil Procedure, filed without leave of court, and that Fox-Gibson was surprised and prejudiced by the filing. A hearing was held on December 1, 2015. On March 17, 2017, the probate court signed its judgment. The court decreed that the TRS benefits were a non-probate asset, that Ward was the designated beneficiary at Gibson’s death, and that Ward as payable-on-death beneficiary was entitled to all of the TRS benefits. Fox-Gibson appealed.
The Probate Code Permits Late Filing of Opposition
Fox-Gibson complained that the probate court abused its discretion by failing to strike Ward’s amended petition for declaratory judgment. She argued that the matter had been fully tried in the January 2014 hearing and that the probate court abused its discretion in permitting Ward to amend her pleadings months later without leave of court in violation of Rule 63. That rule provides that pleadings filed after seven days before trial may be filed only after obtaining leave of the trial judge, which shall be granted unless there is a showing that such filing will operate as a surprise to the opposite party.
The Texas Rules of Civil Procedure govern proceedings in probate matters except in those instances in which a specific provision has been made to the contrary. The Texas Estates Code provides that a person interested in an estate may, at any time before the court decides an issue in a proceeding, file written opposition regarding the issue. The person is entitled to process for witnesses and evidence and to be heard in opposition.
Section 55.001 of the Estates Code does not require leave of court to file an opposition and does not allow the probate court to deny the filing because of prejudice or surprise to a party opposing the filing. This differs from Rule 63, which requires leave of court for late-filed pleadings.
The determination of whether the TRS plan benefits consisted of community property and whether Fox-Gibson was entitled to any of the benefits was initially brought before the probate court in Fox-Gibson’s application. Although there was a hearing in January 2014, this was by no means the final hearing on these issues. The probate court, realizing that the evidence was not sufficient for it to make a ruling, required the filing of an application to determine heirship to obtain additional evidence.
Community Property Characterization Does Not Control Distribution
Fox-Gibson complained that the trial court erred in its ninth conclusion of law stating that any presumption that the TRS plan benefits were community property was rebutted by the proof of the beneficiary designation. She argued that because the TRS plan benefits were in Gibson’s possession during their marriage, they are presumed to be community property and that Ward did not offer evidence to overcome that presumption.
Generally, the character of property as separate or community is determined at the beginning of that property’s ownership. Community property consists of property other than separate property that is acquired by either spouse during the marriage. Income produced by separate property during marriage is community property. Deferred compensation plans, such as the TRS plan, are considered community property only to the extent they are attributable to the spouse’s employment during marriage.
The trial court’s findings established that Gibson began his employment with the University of Dallas in June 1989 and continued his employment until his death in June 2011. He was a member of the TRS plan for the duration of his employment. Gibson and Fox-Gibson were married in September 2003. Therefore, that portion of the TRS plan benefits attributable to Gibson’s employment while he was married to Fox-Gibson was community property. The later designation of Ward as Gibson’s beneficiary under the plan had no effect on the nature of the property interest in the plan, whether community or separate. The court agreed with Fox-Gibson that conclusion of law number nine was erroneous.
However, that was not the end of the inquiry. Property passing at death pursuant to the terms of a contract, such as contributory retirement plans, are non-probate assets that are not subject to disposition by will or by the rules of intestate succession. The disposition of these assets is controlled by lifetime transfer rules. While being earned by the employee spouse, the right to the benefits under the retirement plan is subject to the employee spouse’s sole management, control, and disposition. This includes the right to designate how the benefits will be paid, whether at retirement or in the event of the employee spouse’s death.
By statute, a TRS plan member may designate one or more beneficiaries to receive benefits payable by TRS on the death of the member and file it with TRS. The probate court made unchallenged findings that the TRS plan benefits are non-probate assets, that the TRS plan to the extent it accrued benefits during the marriage was the sole management community property of Gibson, that Gibson designated Ward as his plan beneficiary in June 1989, that the designation was never revoked or changed, and that at Gibson’s death the TRS plan benefits became payable to Ward.
The ultimate judgment was that the TRS plan benefits were payable to Ward as the designated beneficiary under the plan. These unchallenged findings and conclusions, as well as the judgment, were consistent with the Texas Supreme Court’s holdings in Valdez v. Ramirez, 574 S.W.2d 748 (Tex. 1978). Since the probate court entered the proper judgment, its erroneous conclusion of law did not require reversal.
The Takeaway
The Estate of Gibson decision establishes that retirement plan benefits passing pursuant to beneficiary designations are non-probate assets not subject to disposition by will or intestate succession rules even when a portion of those benefits constitutes community property. While benefits accrued during marriage through an employee spouse’s employment are community property, the employee spouse retains sole management, control, and disposition rights over those benefits during life. This sole management authority includes the right to designate beneficiaries who will receive death benefits. A beneficiary designation executed before marriage remains effective after marriage unless the employee spouse revokes or changes it. The surviving spouse’s community property interest does not override the beneficiary designation or entitle the surviving spouse to any portion of the benefits if the employee spouse never changed the designation.
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