Custodian's Failure to record beneficiary info

[jstorch]

Any suggestions on the following fact pattern?

IRA owner's spouse dies late 2001. IRA owner himself has terminal cancer, sees attorney to update estate documents. IRA owner and spouse had 3 kids, all in mid-30's. (No other spouses or children for either owner/spouse.)

Attorney prepares attachment naming each child 1/3 beneficiary, to be used for IRA and other beneficiary accounts. (Will likewise names each child 1/3, and default state intestecy law would yield same 1/3 result.)

In February of 2002, attorney sends change of beneficiary designation form with custom beneficiary attachment for IRA with Bank 1. IRA certificate comes due in April 2002. Intent all along was to roll over IRA to different bank. Estate planning materials (letter from attorney to IRA owner) show this intent plainly.

IRA owner in fact does roll over IRA to Bank 2 in April 2002 and handles the paperwork in person, without attorney. Dies later in 2002. IRA is currently in certificate of deposit, worth about $80,000.

Upon checking the IRA documents, the beneficiary attachment was not included. The space for a beneficiary designation is blank. Bank 2's position is that no beneficiary designation was made. Default under Bank 2's IRA contract is that estate is beneficiary.

Bank has been provided copies of Bank 1 designation and attorney's correspondence, but is firm that without a designation saying "Bank 2", there is no valid beneficiary designation. Doesn't matter to Bank 2 that each child gets 1/3 either way but takes less of a tax hit if they are the beneficiaries of the IRA rather than the estate.

Beneficiaries want to know what their options are and if they have any recourse against the bank. Assume all 3 would keep the IRA in tax deferred soloution, taking only required minimum distributions.

As for options, I see the following:

1. Don't fight the bank. Let the estate get the IRA; stretch out payments as long as possible. I believe this is five years. Is this correct? If so, does the estate need to be kept open until the IRA paid out?

2. Fight the bank. Take Bank 2 to court to require it to treat them as 1/3 beneficiaries each. My concern in pursuing this option is both the likelihood of success and the cost/benefit analysis.

As to the bank, I believe there is an argument that:

1. They had a duty to obtain beneficiary information and neglected to do so; or

2. They must have had the attachment but lost it. (Why else would the beneficiary designation be blank?)

Either way, it appears to be a negligence case. If so, I don't collecting anything more than the tax difference between paying taxes now (or next 5 yrs) by naming the estate or paying taxes later (over the 3's life expectancy), plus any deferred growth.

I'd appreciate comments on the above, and especially answers to the following:

1. Are my assumptions above (e.g., 5 yr payout for estate; amount Bank 2 could be on the hook for) correct?

2. Any other theories of liability against Bank 2? (Especially ones with award of attorneys fees available?)

3. Any idea what the relative tax hit would be if they took the $ now into the estate, rather than were able to keep as direct beneficiaries?

4. Can you suggest any other options/strategies?

Thanks for any help.

[Guest Pensions in Paradise]

Sorry to use your case as an example, but this is exactly why people should always consult an attorney for legal matters. (Caveat - I am not an attorney and, in fact, I have run across my fair share of attorneys who don't always know what they are talking about.) People see a simple adoption agreement and think they can fill it out themselves, but when things go wrong they look for someone to blame.

Short answer to all your questions - tough luck. You stated yourself that the IRA owner filled out the Bank 2 paperwork himself without the attorney. Why didn't he use the attorney the second time?

Bank 2 has no responsibility to ensure that the beneficiary designation is completed properly. That's why their document states that if the beneficiary designation is blank, it defaults to the estate. What if the IRA owner had only listed one child instead of all three? Would the bank then be liable because they were somehow supposed to realize that the IRA owner had intended for all three to be beneficiaries?

As for you saying that the Bank must have had the attachment but lost it (because the beneficiary designation was left blank on the form), have you never seen a form filled out which says "See Attachment."

I'm so tired of people always trying to point the blame elsewhere. The IRA owner messed up. Deal with it.

[Guest Derelict]

^^Harsh but true.

You are correct on the 5-Year Rule if the participant did not reach their required begining date.

1. They had a duty to obtain beneficiary information and neglected to do so; or

2. They must have had the attachment but lost it. (Why else would the beneficiary designation be blank?)

They gave the participant every opportunity to designate a beneficiary, and told them what the defaults were if no beneficiary is designated. Many people leave the beneficiary designation blank, it does not mean there is an attachment.

I do not see any recourse with the Bank.

It's an unfortunate case, but not all that uncommon.

[mbozek]

There is one possible option- Consult an experienced Trust and Estates attorney to see if state law permits the personal representative of the IRA owner's estate to petition the probate court for a construction proceeding to declare that the IRA owner intended to make the children the beneficaries of the Bank 2 IRA. The estate will have to make bank 2 a party, it is a long shot to prove the intent to make the children the benficaries and it is expensive.

[jstorch]

To Pensions in Paridise:

Why, yes, I have in fact "seen a form filled out which says "See Attachment.""

This particular form did NOT have that language in the blank spot--that's the whole issue. A blank, with nothing on the form saying "if this is left blank, X is the default", should have been a red flag to the bank officer. (The default language re: going to the estate if blank was in a document that apparently was not provided to the IRA owner.)

I did not mention that in the IRA certificate holder that was given to the account holder, there were two photocopies--one of an unrelated woman's driver's license and one of her social security card. All the more reason I suspect the bank screwed up; imagine the fraud potential and bank liability there.

In response to your opening statement, an estate attorney was consulted. The attorney drafted the appropriate language. All that needed to be done was for the IRA owner to give the language to the bank and the bank officer complete the form properly. (My initial post indicated the IRA owner handled the paperwork in person; what I did not specify was that the bank officer filled in the form for the owner at his instructions.)

As for not bringing the attorney to the bank, the IRA owner trusted the bank officer (of course, this is the same officer one who gave him another's driver's license and social security card information) to effectuate the instructions his attorney prepared for him and which he took to the bank.

Don't know why you're so hostile to the thought the bank officer could have screwed up, but would appreciate it if you could keep your repressed anger to yourself.

[Guest Pensions in Paradise]

jstorch,

In reviewing my OLD post, I realize the tone was a bit harsh. But I stand by everything I said. And trust me, I'm definitely not defending banks. I've had quite a few experiences with them messing things up.

Question - since it's been so long since your original post, what was the outcome of this situation?

[jstorch]

After pursuing the matter up several supervisory levels and getting the bank's legal department to sign off, the bank agreed to accept the attorney's beneficiary designation, and treated the 3 siblings as 1/3 beneficiaries each. Bank admitted no wrong, and required beneficiaries to sign an indemnification in case the IRS challenged the treatment. I do believe the veiled hints that the bank violated fiduciary duties may have helped the bank come to its decision.

I think it's the right result, but a lot of work (and about 8 months of uncertainty) could've been avoided. I agree, in retrospect, would've been better for the original attorney either to have completed the form or reviewed it afterward, but when the IRA owner says he'll handle things himself, there's not much else you can do.

Thanks to all who gave suggestions.

[mbozek]

JS: I dont think the bank agreed to allow the distribution to the heirs because of the fear of fiduciary liability since a bank has no fiduciary duty to its customer unless it agrees to act a a fiduciary, e.g., to manage investments. The ministerial act of opening an IRA account for a customer and processing the forms does not make a financial institution a fiduciary. IRA account agreements will usually have a statement noting the that the bank is not responsible for the lack of a bene designation or a change of beneficary which is not received by the bank.

The bank agreed to divide the account in order to close the file and limited its risk through the indemnificaton by the beneficaries.

[John G]

Jstorch, thank you for providing an update on your issue. This site tries to solve problems and answer questions for folks who post... but your last post helps with the larger issue of building the knowledge base of the casual visitors. I would imagine that many people who read this thread are wondering if they got the benefitiary designations on their IRAs. It is a smart thing to check periodically.

One further note. There are some creative things that can be done with primary vs secondary designations. For example, each spouse can make each other primary and children secondary. Upon the death of a spouse, the surviving spouse can let the benefitiary designation take effect, OR the surviving spouse can decline to receive the funds... which means the secondary beneficiaries would rule. Some survivors may rely upon those funds for their remaining years, others may choose to let the assets flow to the heirs. Declining might be part of a strategy to mitigate inheritance taxes. Not many people are aware of this option.

A final note: As one of the moderators of this message board, I was pleased to see that Pension in Paradise did find acknowledge that his first post was overly edgy. I also thought it was a little too emotional and judgemental. This site works best when we strive hard to understand the problem, communicate clearly and provide useful information. We are very different from Yahooland or the second vast wasteland - the average internet message boards. Thank you to both Jstorch and Pension in Paradise for getting the message thread back on track.