Husband, who resided in a community property state, purchased
with community funds United States Savings Bonds registered in his
name with his brother, the petitioner, named as beneficiary. The
husband's will left all cash and bonds to petitioner, four sisters,
and a nephew. Petitioner sued to establish ownership of the savings
bonds, relying on 31 CFR § 315.66, providing that, on the
registered owner's death, the beneficiary will be recognized as
owner. The State Supreme Court, affirming the judgment of the lower
court that half the savings bonds were to go to the wife, and the
other half under the will, held that the husband's purchase of such
bonds out of community funds constituted "constructive fraud" of
the wife's rights.
Held: Under 31 CFR § 315.66, petitioner, in accordance
with
Free v. Bland, 369 U. S. 663,
must be recognized as owner of all the savings bonds unless their
purchase by the husband was a fraud on his wife's property rights
or a breach of trust with respect thereto -- concerning which the
case is remanded for establishment of the facts; but, in any event,
petitioner is entitled to one-half the savings bonds (subject to
possible allocation for debts), since the husband owned a half
interest in them which he could dispose of to the beneficiary of
his choice. Pp.
376 U. S.
309-313.
(a) If the wife consented to or ratified the bond purchase,
there was no fraud. P.
376 U. S.
310.
(b) If, under state law, a widow's half interest is in the
estate generally, rather than in each asset thereof, all the
savings bonds must go to petitioner, since they constituted less
than half of the gross estate; otherwise, and in the absence of the
widow's consent or ratification, she is entitled to one-half the
savings bonds, and petitioner the other. Pp.
376 U. S.
310-312.
60 Wash. 2d
179,
373 P.2d
125, reversed in part; vacated in part and remanded.
Page 376 U. S. 307
MR. JUSTICE WHITE delivered the opinion of the Court.
Two Terms ago, in
Free v. Bland, 369 U.
S. 663, where federal savings bonds purchased with
community funds were registered in a co-ownership form and the
registered co-owners were husband and wife, the survivor was held
entitled to the proceeds of the bonds without liability to account
in any amount to the beneficiaries of the deceased co-owner,
despite conflicting state law purporting to forbid a married couple
to make survivorship arrangements with respect to community
property and requiring such property to pass as part of the estate
of the deceased in accordance with his will or the state intestacy
laws. The success of the management of the national debt was deemed
to depend upon the successful sale of the savings bonds, one of the
inducements to purchasers being survivorship provisions which
afforded "a convenient method of avoiding complicated probate
proceedings." 369 U.S. at
369 U. S. 669.
State law interfered with a legitimate exercise of federal power,
and was required to give way under the Supremacy Clause of the
Constitution.
The Court nevertheless recognized that the federal law was not
to be used as a shield for fraud or to prevent relief
"where the circumstances manifest fraud or a breach of trust
tantamount thereto on the part of a husband while acting in his
capacity as manager of the general community property."
369 U.S. at
369 U. S. 670.
The scope and application of the exception to the regulatory
imperative -- "the doctrine of fraud applicable under federal law
in such a case," 369 U.S. at
369 U. S.
670-671 -- were left to decision in other cases.
This is one of those cases. Petitioner is the brother of Angel
Yiatchos, who died in 1958 and who, in 1950-1951,
Page 376 U. S. 308
purchased with community funds belonging to himself and his wife
United States Savings Bonds in the face amount of $15,075. The
deceased was the registered owner of the bonds, and they were made
payable on his death to his brother, the petitioner. The deceased
left a will made in 1954, naming his wife as executrix and
bequeathing all cash and bonds owned by him at the time of his
death to his brother, four sisters and a nephew. Petitioner brought
suit in the appropriate court in the State of Washington to
establish his ownership of the bonds, relying upon the federal
regulations providing for registration of the savings bonds in the
beneficiary form and providing that, in the case of the death of
the registered owner,
"the beneficiary will be recognized as the sole and absolute
owner, and payment or reissue will be made as though the bond were
registered in his name alone."
31 CFR § 315.66. The trial court, on stipulated facts, sustained
the claims of the wife and the other beneficiaries under the will,
who insisted that, since the bonds were purchased with community
funds and were community property at the death of the deceased,
they must be divided into two equal parts, one-half to go to the
wife and the other half to be distributed in accordance with the
will. The Supreme Court of Washington affirmed, holding that the
deceased's
"purchase with community funds of bonds payable to him alone or,
after his death, payable exclusively to his brother was in fraud of
the rights of the respondent wife"
and "a void endeavor to divest the wife of any interest in her
own property." The deceased having been under a fiduciary duty to
manage the community funds for the benefit of the community, "[a]
breach of this duty [was] a constructive fraud." Petitioner's claim
to any part of the bonds as beneficiary named therein was rejected,
since "[r]espondent widow had a vested one-half interest in the
bond proceeds," and since
"[t]he descent of decedent's interest is
Page 376 U. S. 309
controlled by RCW 11.04.050, and, therefore, must be distributed
according to the terms of the will."
In re Yiatchos' Estate, 60 Wash.
2d 179, 182,
373 P.2d
125, 127. We granted certiorari to consider an asserted
conflict with
Free v. Bland, supra, which was decided
while this case was on appeal in the Washington Supreme Court, and
which that court considered in rendering its own judgment.
Under the federal regulations, petitioner is entitled to the
bonds unless his deceased brother committed fraud or breach of
trust tantamount to fraud. Since the construction and application
of a federal regulation having the force of law,
Public
Utilities Comm'n v. United States, 355 U.
S. 534,
355 U. S.
542-545;
Standard Oil Co. v. Johnson,
316 U. S. 481,
316 U. S. 484,
are involved, whether or not there is fraud which will bar the
named beneficiary in a particular case must be determined as a
matter of federal law,
Free v. Bland, supra; Clearfield Trust
Co. v. United States, 318 U. S. 363.
But, in applying the federal standard, we shall be guided by state
law insofar as the property interests of the widow created by state
law are concerned. It would seem obvious that the bonds may not be
used as a device to deprive the widow of property rights which she
enjoys under Washington law and which would not be transferable by
her husband but for the survivorship provisions of the federal
bonds.
Proceeding on these premises, we note that, under Washington
law, spouses may agree to change the status of community property
either by an agreement to become effective on the death of either
spouse, Rev.Code Wash. § 26.16.120;
In re Yiatchos'
Estate, 60 Wash. 2d
179, 182,
373 P.2d
125, 127, or by gift during lifetime;
Hanley v. Most,
9 Wash. 2d 429, 458, 115 P.2d 933, 944. Thus, the widow in this
case could have consented to a gift of community property to her
husband's brother or to the inclusion of the bonds in that portion
of the estate which belonged to her husband and which he could
dispose of
Page 376 U. S. 310
at the time of his death. If she gave such consent, or if she
ratified the purchase and registration of the bonds, the conduct of
the husband was not, for federal purposes, fraud or breach of trust
sufficient to avoid the command of the regulations, and petitioner
would be entitled to all of the bonds.
So far petitioner apparently agrees, but he denies the need for
further inquiry, claiming all of the bonds because the record is
silent about the knowledge or consent of the wife, she having made
no claim of fraud and produced no facts negativing her consent or
knowledge. But we think the course suggested by the United States
in its
amicus curiae brief is preferable. The factual
record was made by the stipulation of the parties prior to decision
of
Free v. Bland, supra. Before precluding the widow
because of her own conduct, she should have an opportunity upon
remand to prove the actual facts concerning her knowledge or
participation in the purchase and registration of the bonds.
Petitioner, however, also objects to a remand because further
inquiry into consent or acquiescence rests upon the erroneous
assumption that the wife could object to the husband's transfer of
the bonds after his death. Since the present value of the bonds, or
even their face value, is less than one-half the community
property, the deceased, says petitioner, was not attempting to give
away property belonging to his wife, but was only making use of a
simple device provided by federal law to dispose of what he could
give by will under the Washington law. The validity of this
contention turns on a question of state law about which we are not
entirely clear, and which may be resolved upon remand. According to
the court below, the widow had a "vested one-half interest" in the
bonds, which may mean that, under Washington law, the wife before
and after death has a half interest in each item of the community
estate, including the particular
Page 376 U. S. 311
bonds involved in this case, and cannot be forced to take cash
or something else of equal value upon a division of the community
property between herself and those entitled to take her husband's
half. Under such circumstances, since we cannot say that this
property right, if it exists, is insubstantial, to allow all of the
bonds to pass to the designated beneficiary would effect an
involuntary and impermissible conversion of the widow's assets.
On the other hand, Rev.Code Wash. § 26.16.030 provides that
"The husband shall have the management and control of community
personal property, with a like power of disposition as he has of
his separate personal property, except he shall not devise by will
more than one-half thereof."
If, under Washington law, the widow, after her husband's death,
has no interest in specific assets owned by the community and her
half of the community estate may be satisfied from property or
money other than the bonds, petitioner is entitled to all of the
bonds, for then there is no fraud or breach of trust in derogation
of the widow's property rights under state law. Upon dissolution of
the community, one-half of the community property belonged to Angel
Yiatchos, who was free, as of the time of dissolution, to dispose
of this half as he pleased. He might have left it to his brother by
will. Instead, he elected to effect the same result by utilizing
federal savings bonds with their convenient feature of permitting
ownership spanning two lives. On the assumption, then, that the
wife is entitled to half of the estate, but not half of each
particular item of property, the bonds have not been used as an
instrument of fraud, and the survivorship provisions of the federal
regulations must control, preempting, if necessary, inconsistent
state law which interferes with the legitimate exercise of the
Federal Government's power to borrow money.
Free v. Bland,
supra.
Page 376 U. S. 312
Petitioner is therefore entitled to all of the bonds if the
widow consented to making him the beneficiary or if, under
Washington law, the surviving spouse does not have a one-half
interest in each community asset. But even if the wife is not
barred by her own consent or by the nature of her interest from
claiming a half interest in the bonds, petitioner is entitled to
the other half, the half which belonged to the deceased and could
be disposed of by him to the beneficiaries of his choice. The
Washington court deemed the transaction void
ab initio,
and required the deceased's half to pass by his will, rather than
by virtue of the bonds and the force of the regulation. But the
petitioner was entitled to the proceeds only on the death of the
husband, and then only if the bonds had not matured or been cashed.
During the husband's life, he was the registered owner of the
bonds, and was therefore entitled at any time to convert them into
cash upon presentation and surrender "as though no beneficiary had
been named in the registration." 31 CFR § 315.65. Aside from
possible consequences of the wife's consent or ratification, as
long as Angel Yiatchos was alive, the bonds were community
property, and could be used by him -- the manager of the community
and the registered owner of the bonds -- for community purposes,
just as the assets used to purchase them could have been so used.
Thus, the holding of the court below, which requires that the bonds
be disposed of by will or by state intestacy provisions, is nothing
more than a state prohibition against utilizing savings bonds to
transmit property at death, and is, for reasons stated above,
forbidden by
Free v. Bland, supra.
We add but one caveat to our holding that petitioner is entitled
to at least one-half the bonds. The bonds, it would appear, are
less than one-half the gross estate, but the record does not
compare the value of the bonds with one-half the net estate after
payment of debts. It is our understanding that the deceased's
interest in the community
Page 376 U. S. 313
property is chargeable with his separate debts and with one-half
the community debts.
Ryan v. Ferguson, 3 Wash. 356, 28 P.
910. It would not contravene federal law as expressed in the
applicable regulations to require the bonds to bear the same share
of the debts that they would have borne if they had been passed to
petitioner as a specific legacy under the will, rather than by the
survivorship provisions of the bonds.
The judgment of the Washington court is reversed insofar as it
relates to one-half of the bonds, subject to the above remarks
concerning the portion of the debts which may be allocable thereto.
As to the other half, the judgment is vacated and the case remanded
for further proceedings not inconsistent with this opinion.
It is so ordered.
MR. JUSTICE CLARK, whom MR. JUSTICE DOUGLAS joins,
dissenting.
The question to be determined under
Free v. Bland,
369 U. S. 663
(1962), is whether or not the purchase of the bonds by the deceased
operated to deprive his surviving wife of her one-half undivided
interest in the community property of the spouses. If that purchase
operated to deprive her of her one-half interest in the community
property, it is tantamount to a constructive fraud upon the
community property, and, under
Free v. Bland, supra,
relief must be granted to the extent of making whole the surviving
wife's undivided interest.
It therefore appears to me that the proper order in this case
would be to vacate the judgment and remand the case for
consideration of the following matters, all of which involve an
interpretation of Washington law:
"(1) Was the purchase of the bonds and the designation of
petitioner as beneficiary an act within the deceased husband's
statutory (Wash.Rev.Code
Page 376 U. S. 314
§ 26.16.030) management powers, or did the surviving spouse
consent to, or subsequently ratify, the transaction? If either
question is answered in the affirmative, the bonds must be
delivered to the petitioner. If both questions are answered in the
negative, then"
"(2) What is the amount of the debts, both community and
separate, chargeable to the estate? And"
"(3) Is there sufficient property after the payment of these
debts for the surviving wife to receive her one-half undivided
interest in the community estate without having to resort to the
bonds? If this question is answered in the affirmative, the bonds
must be delivered to the petitioner, and the surviving wife must
receive her one-half undivided interest in the community property
from that remaining. If there is not sufficient property in the
estate to satisfy the surviving wife's undivided one-half interest
from that remainder, then the bonds must be subjected to this
deficit, after which the balance of the bonds, if any, would go to
the petitioner."
The opinion of the Court conjectures that it might be the law of
Washington that a surviving spouse has a one-half interest in each
item of the community estate, and that, if this be so, then
allowing all of the bonds to pass to the designated beneficiary
would work an involuntary conversion of the spouse's one-half
interest in those bonds. The proposition that a spouse has such an
interest in each item is of doubtful validity, and there is no
Washington authority to support it. Further, there is, at the very
least, a question of whether such state law, even if it did exist,
should be allowed to override the beneficiary designations of the
federal bonds. The Court is passing upon this important issue even
though it has not been considered by the parties in either their
briefs or oral argument.