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IRA beneficiary designation in conflict


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There was a case about a year ago in which the New York County Surrogate's Court allowed a provision in a Will to override the default provision in the IRA, where the IRA custodian waived strict compliance with the terms of the IRA agreement.

This is still two steps away from allowing the Will to override a beneficiary designation. In the court case, the Will was overriding a default provision rather than a specific beneficiary designation. Also, in the court case, the IRA custodian waived strict compliance with the terms of the IRA agreement (though it's hard to see why this should matter, since the IRA custodian is really just a stakeholder with no economic interest in the outcome other than to make sure it's protected against having to pay out twice).

An argument could be made that it might be useful to be able to override beneficiaries by Will. An ill person needing to revise his/her estate plan quickly might not be able to obtain beneficiary designation forms for all of his/her nonprobate assets, and it would be simpler if he/she could override his/her beneficiary designations by Will. If the IRA (or other nonprobate asset such as qualified plan benefits or life insurance) is sufficiently flexible, the owner could change the beneficiary by letter, but some IRAs, etc., might not be sufficently flexible.

The concern may be that IRA custodians ought to be able to rely upon the beneficiary designation in their records. However, this concern could be alleviated by protecting the IRA custodian who pays out to the beneficiary on its records, and leaving the beneficiary under the Will to pursue the designated beneficiary.

A similar issue arises upon divorce. In many states, a divorce revokes the provisions for the former spouse under the Will, but does not revoke nontestamentary dispositions for the former spouse. Some states are considering legislation to have divorce revoke nontestamentary dispositions for the former spouse.

Except in the case of qualified plan benefits (under the Supreme Court decision in Boggs), a similar issue can arise in community property states, where nonprobate assets may be payable to a designated beneficiary, but the spouse may have a community property interest in the benefits.

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL

Bruce Steiner, attorney

(212) 986-6000

also admitted in NJ and FL

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