John D Dadakisis a Partner in our New York office.
Greg Kiley is a summer Associate.
A recent New York County Surrogate's Court case, Matter of the Estate of Durcan, highlights the importance of properly completing beneficiary designation forms for retirement accounts, even when one has already completed them at a prior custodian. The Durcan case shows that intent alone cannot make up for the failure to comply with the statutory requirements for designating a beneficiary to a retirement account.
Retirement accounts, such as 401(k)s and IRAs, are transfer-upon death accounts, meaning that asset ownership is transferred upon death of the owner by beneficiary designation, rather than being divided by will or intestacy. However, when there is no beneficiary designation on an account, the financial institution's account forms set forth a distribution plan. According to an article on ThinkAdvisor, most of the time, these forms provide that the account is payable to the estate of the owner. This can be troublesome not only for income tax reasons, but because the retirement assets may not pass how the owner truly intended.
The issue in the Durcan case involved four IRA accounts created by Joan Durcan in 2002. When the original IRAs were created at Merrill Lynch, Joan's sister, Mary Anne Cunney, was listed as the sole beneficiary of all four accounts. In 2014, Joan's financial advisor left Merrill Lynch and joined Morgan Stanley. When informed of this change, Joan consented to having her retirement accounts transferred from Merrill Lynch to Morgan Stanley. Although a client data form was filled out listing her sister as the beneficiary of all four accounts, a signed beneficiary designation form was never returned back to Morgan Stanley. Testimony indicated that in two instances over the phone with members of the Morgan Stanley financial planning team, Joan confirmed that her sister was the sole beneficiary of her accounts. However, when Joan passed away a short time later, a signed beneficiary form was not on file with Morgan Stanley, nor was one found among her papers.
Approximately 10 months after Joan's date of death, Morgan Stanley transferred the proceeds of the IRAs, which at the time of death were valued at approximately $2 million, to the sister, Mary Anne Cunney. Morgan Stanley justified this transfer by stating, "In light of Ms. Durcan passing away [while her accounts were in] mid transfer, Morgan Stanley has elected to recognize the profile document as the IRA application."
As Joan died without a will, her brother, James Durcan, was appointed the administrator of her estate (which by intestacy was to pass 1/3 to Mary Anne Cunney, 1/3 to James Durcan, and 1/3 to her five nieces and nephews of a pre-deceased brother) and brought an action claiming that the IRAs belonged to the estate. He relied on section 13-3.2(e) of the New York Estates, Powers, and Trusts Law, arguing that Joan failed to execute a valid beneficiary designation for her IRAs after they were opened at Morgan Stanley. Cunney, in her opposition to the petitioner's motion, asked the court to apply the doctrine of "substantial compliance" and allow Morgan Stanley to deem the Client Data Form as a beneficiary designation.
The Court noted that there were many instances where failure to follow the proper procedure to effect a change of beneficiary, including one where the form had been signed, but not delivered, resulted in courts refusing to honor the doctrine of "substantial compliance." And while the Court was cognizant that the evidence from the Data Form and conversations with individuals at Morgan Stanley raised the fact that Joan intended her sister to be the beneficiary, the Court "reluctantly" concluded that since there was not compliance with the statutory requirement that a beneficiary designation be in writing and signed by the designator, there was not a valid beneficiary designation. Accordingly, Morgan Stanley and Mary Anne Cunney were directed to turn over Joan's retirement accounts to the estate.
This case reflects how important it is for the proper documents designating beneficiaries of non-probate assets to follow formal requirements. Otherwise, the best intentions will not suffice to carry out one's wishes.
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