Does a plan pay on a small-estate affidavit?

[Peter Gulia]

To allow a convenience in collecting the assets of a small estate, some States’ laws permit an affidavit in which one claims she is entitled to the decedent’s property.  Under a typical law of this kind, one might collect up to $50,000 without any court-supervised proceeding.

 

If a participant dies with no surviving spouse and no other designated beneficiary, some retirement plans provide that the participant’s estate is the “default” beneficiary.

 

If a plan you administer or serve is in this situation, is the plan willing to pay a taker based on a small-estate affidavit?

 

If a plan is willing, does the administrator use any extra steps to manage the risk that an affidavit is false (or even innocently incorrect), leaving the plan exposed to claims of the estate’s beneficiaries or heirs?

 

Or does a plan refuse to pay on a small-estate affidavit?

 

BenefitsLink people, what are your experiences?

[ESOP Guy]

This has come up a few times at the firm I work at.  Typically it depends on the amount involved.  Once it was around $80.  The employer was more than happy to take that risk to get the benefit paid.  Once it gets into the thousands they are talking to an attorney.   I have seen a few do this in the $1k-$2k range.  I don't recall anything larger even being asked about.  

So I guess the answer is the conversation starts with how much risk are you willing to take without much research or guidance from a lawyer.  After that a lawyer gets involved and they assess the risks more and a decision has been made. 

[Peter Gulia]

ESOP Guy, thank you for this very useful information.

On those situations in which a lawyer was asked for advice, about how many ended with the plan acting on a small-estate affidavit?  And about how often did a plan refuse to follow a small-estate affidavit?

[Luke Bailey]

FGC, at least in Texas a payor, such as a retirement plan, should be protected in relying on the small state affidavit. See Texas Estates Code Section 205.007:

Sec. 205.007. LIABILITY OF CERTAIN PERSONS. (a) A person making a payment, delivery, transfer, or issuance under an affidavit described by this chapter is released to the same extent as if made to a personal representative of the decedent. The person may not be required to:

(1) see to the application of the affidavit; or

(2) inquire into the truth of any statement in the affidavit.

(b) The distributees to whom payment, delivery, transfer, or issuance is made are:

(1) answerable for the payment, delivery, transfer, or issuance to any person having a prior right; and

(2) accountable to any personal representative appointed after the payment, delivery, transfer, or issuance.

(c) Each person who executed the affidavit is liable for any damage or loss to any person that arises from a payment, delivery, transfer, or issuance made in reliance on the affidavit.

(d) If a person to whom the affidavit is delivered refuses to pay, deliver, transfer, or issue property as provided by this section, the property may be recovered in an action brought for that purpose by or on behalf of the distributees entitled to the property on proof of the facts required to be stated in the affidavit.

Added by Acts 2009, 81st Leg., R.S., Ch. 680 (H.B. 2502), Sec. 1, eff. January 1, 2014.

Maybe you're worried that Texas's or a similar state law is preempted by ERISA, but I wonder. Paying to "the estate" is paying to the personal representative, which presumably is a matter of state law, and the above is tilling you that the small state affiant is the personal representative.

[Peter Gulia]

Luke Bailey, thank you for your observations, especially about the interaction of Federal law and State law.

BenefitsLink neighbors, my query is not about sorting out the law.  Rather, my curiosity is about what plans actually do.

 

[jpod]

These state laws protect the payor against claims of other people who could take from the estate, such as "missing" heirs and creditors of the estate.  If the state law is followed precisely I've seen it done many times.  It's a very low risk proposition.  No preemption concerns.

[Peter Gulia]

jpod, thank you for sharing your observations.

BenefitsLink mavens, for a plan's administrator to treat relying on a small-estate-affidavit law as low-risk, does it matter what amount is claimed?

For example, if a claim is for $100,000 and that amount is within the relevant State's law for a disposition following a small-estate affidavit, does a plan fiduciary treat such a claim as low risk?

[Belgarath]

I agree with EsopGuy. If the amount is trivial, the Employer/Plan Administrator isn't going to pay the money to consult an attorney. If the amount isn't trivial (a subjective determination) then regardless of the state's limit - the Employer is going to at least check with counsel to make the determination. Or to perhaps be more accurate, we are going to RECOMMEND that they check with counsel. Whether they do or not is up to them, as always.

[Peter Gulia]

Belgarath, thank you for making clear that an employer/administrator's outlook on what amount to risk without further review doesn't necessarily relate to a State's limit on what can be claimed under a small-estate affidavit.

 

[EHE]

If no spouse or no named beneficiary, if the small estate affidavit falls in the guidelines of the state it is issued in and it is properly executed, then we always honor it.  Most times the size of the 'estate' isn't large enough to justify opening an estate and going thru probate.  If we didn't use these small estate affidavits we would have many accounts that would go unclaimed.  If something doesn't look or 'feel' right we would get client direction.  We have over 1,000 clients and have been doing this for years with no issues. 

[jpod]

By the way, if the state rules are followed in this scenario, it's not like the plan has any choice in the matter.  I have never seen an instance in which the state rules gives the party holding the estate's asset the right to refuse.  While it may be appropriate for the plan to get legal counsel to fulfill its due diligence, assuming everything is kosher it MUST pay the money to the claimant.

[Peter Gulia]

I’m less confident that a plan always lacks a choice about whether to pay on a small-estate affidavit.  Much turns on the governing documents’ provisions.  Especially on exactly how a document describes a “default” beneficiary.

 

It’s one thing if a plan’s administrator considers a State law in resolving a status question that otherwise might not be resolved under ERISA and the Federal common law of ERISA.  Or a plan’s administrator might, in its exercise of its discretion, volunteer to consider a relevant State law as an aid to the administrator’s interpretation of the plan.

 

But if applying a State’s law would call for an outcome different than the administrator’s finding about what the plan provides, an administrator or trustee might assume that ERISA preempts State law.  (And if even a fiduciary might be content with State law, one might worry that a later claimant could argue that following a preempted law was a breach of the fiduciary’s duties.)

 

Consider too the effect of plan-granted discretion and Firestone deference.

 

If a governing document specifies that the “default” beneficiary is “the participant’s estate”, an administrator might decide (perhaps on grounds of the kind Luke Bailey suggests) that a claimant named in a small-estate affidavit sufficiently represents the estate.

 

But what if a plan’s governing documents specify that the “default” beneficiary is not ‘the estate’ but rather “the personal representative of the participant’s estate”?  Could a plan’s administrator decide that the State law referred to in the small-estate affidavit does not make a claimant a personal representative (within the plan’s meaning)?  And wouldn’t a court defer to such a decision (if it’s not an abuse of discretion)?

 

[jpod]

FGC:  You present an interesting change in wording from that in your opening post:  If a participant dies with no surviving spouse and no other designated beneficiary, some retirement plans provide that the participant’s estate is the “default” beneficiary. But, even assuming that change in wording, why on earth would the PA want to take such a position?  Who would have standing to complain?  Probably nobody, other than theoretically the DOL or IRS, but that is extremely unlikely.  If you have more specific concerns please share.     

[Peter Gulia]

I've seen situations in which a plan paid a distribution to a taker named in a small-estate affidavit, and later other claimants asserted that the State law did not relieve the plan's obligation and did not excuse a duty to administer the retirement plan.

The attorneys' fees and other expenses of responding to those claims burdened participants other than the decedent.  (Even if a claim is wholly groundless, a motion to remove a case from State to Federal court, and briefing a motion to dismiss for failure to state a claim on which the court can grant relief costs $$.)

Some small-estate-affidavit laws allow claims up to $50,000 or even $100,000.  Some potential claimants might see an amount as worth fighting about.

Some plan administrators are reluctant to insist that a default-beneficiary claimant get personal-representative powers from a probate court.  But some feel that burdens that follow from an uncompleted beneficiary designation ought to be borne by those who take from the participant.

I've advised on over ten thousand disputed beneficiary claims.  I've seen that a combination of thoughtful plan provisions, plan-administration procedures, and claims procedures can help manage some of the expenses.

Sometimes it makes sense to fall-in with a small-estate-affidavit law, but not always.

[Mike Preston]

10,000?

[Peter Gulia]

$100,000.

For example, Illinois law allows a maker of a small-estate affidavit to claim an estate up to $100,000.

California allows up to $150,000.

Some of my clients think that's not a trivial amount for a retirement plan to pay with nothing more than a claimant's self-serving statement no one tested.

 

[Mike Preston]

I read your post as saying you have been engaged 10,000 times on this issue.

[jpod]

We live in a litigious world.  The same exposure to a claim would exist if you deny payment in response to a perfectly kosher small estate/affidavit procedure.  I think you overthink this.    

[Peter Gulia]

Mike Preston, my estimate of over 10,000 is for all kinds of beneficiary disputes, not just small-estate issues.

 

I’ve been in retirement services over 34 years.  My first 21¼ years were inside a big recordkeeper, which served thousands of plans and over 10 million participants.  In those years, I ran a weekly meeting to review beneficiary claims, reviewing only those that called for special handling.  Those meetings often presented a dozen (sometimes two dozen) new disputes.

 

[Christine Roberts]

Just received a query re paying out based on a small estate affidavit and this thread was a gold mine.  Peter, thanks for kicking it off and for furthering the conversation.