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    TAX & ESTATES: IRAs—Designation of Beneficiaries

    Posted by Gale Burns on Tue, Jul 9, 2013 @ 15:07 PM

    July 8, 2013

    Jim Witt, Senior Attorney, National Legal Research Group

    While the designation of beneficiaries and the requirements for changes thereto are normally spelled out in clear terms, complications can arise.  In the North Carolina Court of Appeals case, Smith v. Marez, 719 S.E.2d 226 (N.C. Ct. App. 2011), a dispute arose over the proper disposition of the proceeds of two IRAs (a Rollover IRA and a Traditional IRA) owned by the decedent.  The plaintiff, in her individual capacity and as executrix of the decedent's will, filed a complaint in a declaratory action against the defendants, alleging that the proceeds of the Rollover IRA had been properly distributed to her and that the proceeds of the Traditional IRA should have been distributed to her.  The defendants, three of the decedent's children, contended that the proceeds from the two IRA accounts were the property of the decedent's estate and did not belong to the plaintiff. The defendants filed a counterclaim, asserting that the decedent had intended the two IRA accounts to go to them in the percentages set forth in his will or, in the alternative, that if the changes to his IRA beneficiary forms were not effective (directing that the IRA proceeds be distributed in accordance with his will, which included the defendants as beneficiaries), the IRA accounts should have been distributed pursuant to the original designation forms, which gave the defendants specific percentages.

    In affirming the grant of the plaintiff's motion for summary judgment, the court of appeals found that, as per the record before it, the decedent had executed both IRAs in 2006, making beneficiary designations to the defendants in specific percentages. In 2007, after the decedent had been diagnosed with cancer, he executed his will, under which he bequeathed $100,000 to the plaintiff and the residue of his estate to the defendants in specific percentages, different from those in the IRAs.  On the same day, the decedent executed new designation-of-beneficiary forms for the IRA accounts.  In the space provided on each form, he directed that the proceeds of the accounts be distributed pursuant to his last will.

    In December 2007, the decedent was informed that his cancer was terminal.  He married the plaintiff on December 16, 2007 and died on February 29, 2008.

    In reviewing the grant of the plaintiff's motion for summary judgment, the court applied New York law, the jurisdiction designated by the decedent on the IRAs.  The court broke down its discussion into three categories:  contract interpretation, doctrine of dependent relative revocation, and incorporation by reference.

    The court's basic finding as to contract interpretation was that, given that there was no evidence that the custodian of the IRAs had waived strict compliance with the requirement of the IRAs that the beneficiary designations include information such as the beneficiary's name, date of birth, and Social Security number, the decedent's direction that the IRA proceeds be distributed in accordance with his will was not in accord with the beneficiary designation requirements; the court also found that the decedent's original designations of individual beneficiaries could not stand, because they had been explicitly revoked by the decedent on the change-of-beneficiary forms.

    The court rejected the defendants' assertion of the doctrine of dependent relative revocation (under which, if a revocation of a beneficiary is proven to have been conditioned upon the validity of a subsequent designation, the revocation is found to be ineffective), because the application of the doctrine has been limited to wills.

    Finally, the court rejected the application of incorporation by reference, because the decedent's reference in the IRA change-of-beneficiary forms to the document to be incorporated, the decedent's will, was insufficiently precise in that the general direction of payment of the proceeds pursuant to the will was not clear either as to which beneficiaries under the will were to share the proceeds or as to the amounts or percentages each was to receive.

    The case thus stands as a warning to those executing IRAs, or trying to effect changes as to the beneficiaries of IRAs, to pay strict attention to requirements on the form as to the designation of beneficiaries.  This is especially true where the intent is to distribute the IRA proceeds in accordance with a scheme of disposition under a will.

    Topics: legal research, Jim Witt, tax and estates, beneficiaries, designation, distribution of proceeds, contract interpretation, dependent relative revocation, incorporation by reference, adherence to form requirements

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