Last month, I wrote a blog post about why it is a good idea to review the beneficiary designations on your retirement accounts, investment accounts, bank accounts, and other accounts. Account beneficiary designations allow the account to pass directly to your named beneficiaries when you die outside probate. A recent Division One of the Washington Court of Appeals case reiterates why it is so important to make sure your account beneficiary designations are in order. In addition, this case also serves as a cautionary tale as to why it is essential to review the terms and conditions of retirement accounts and other investment accounts.
The case, In re Estate of Wood, involved a dispute over who was entitled to an IRA where the account would be distributed to both children of the account holder under the account’s terms but entirely to one child under the terms of the Will. Carol Wood had two children, Susan and Scott. Aside from some items of personal property, Carol wrote in her Will that she intended Susan to receive no distribution from her estate. Carol opened retirement accounts and investment accounts at Edward Jones. Around the same time she signed her Will disinheriting her daughter, she also signed a form revoking her prior IRA beneficiary designations. She did not designate a new beneficiary on her Edward Jones IRA and signed a form which stated that if no beneficiary designation was on file, the account agreement’s “default” language applied. Carol appears to have believed that if she did not designate a beneficiary, the “default” language would provide for her IRA to pass to her estate and be distributed under her Will. Under her Will, this meant that the entire IRA would be distributed to Scott.
However, the account agreement’s “default” language did not provide for the account to be distributed to Carol’s estate. Instead, the account agreement’s terms provided that if the account holder did not designate a beneficiary for the IRA, the account would be distributed as follows: first to the account holder’s spouse and then to the account holder’s descendants. Only if the account holder died without a spouse or descendants would the IRA be distributed to their estate. This meant that, under the account agreement’s terms, the IRA would be distributed in equal shares to Scott and Susan.
It can be assumed that Scott believed that all of the IRA should be distributed to him under the Will, while Susan believed that half of the IRA should be distributed to her under the account agreement. The case went to trial, and because the trial court found no evidence that Carol ever intended the IRA to pass to both of her children, it issued an order directing that the IRA be distributed to the Estate (and thus only to Scott). Susan appealed, and the Court of Appeals ruled that the trial court should not have considered Carol’s Will as evidence of her intent when it ruled that the IRA should be distributed to her Estate rather than according to the terms of the account agreement. An account agreement is a contract, and the Court of Appeals found the default beneficiary language in the account agreement to be clear. The Court of Appeals sent the case back to the trial court, where it seems likely that the IRA will be ordered to be distributed according to the terms of the account agreement.
What lesson can be learned from this case? Before allowing an account to revert to the default beneficiaries, review the account agreement. Better still, use the beneficiary designation form to name specific beneficiaries. Here, the error appears to have been in not reviewing the account agreement before allowing the IRA to be distributed to the default beneficiary under the assumption that the default beneficiary was the estate. The result? Although Carol worked with an estate planning attorney to update her Will and also reviewed her account beneficiary designations, her estate still ended up mired in litigation and a child she intended to disinherit may well end up as beneficiary of half of her mother’s IRA because she relied on default terms in an account agreement without first reviewing those terms.