Take-Away: An old IRA beneficiary designation is still effective despite the owner’s stated intent, days before his death, that all of his assets, including beneficiary controlled assets, should be divided equally among all of his children, not just the one designated IRA beneficiary. Yet an IRA beneficiary designation can be changed through the IRA owner’s Will in Michigan. According to the Court, the IRA will need to be specifically identified in the owner’s Will before it to be a binding change in IRA beneficiary designation.

Reported Decision: In re Estate of William Patrick McNeight, Michigan Court of Appeals, No. 34077, (Unpublished July 2, 2019)

Facts: Bill completed an IRA beneficiary designation in 2003 at Bank One, naming his daughter, Julianne, as the IRA beneficiary. In the following years, Bill made several investment changes to his IRA, but not its beneficiary designation. Bank One later was acquired by Chase. In 2012, Bill opened a ‘brokerage account’ with Chase that allowed Bill to acquire other investments for his IRA. At that time, Chase required an internal, separate adoption form on which a beneficiary designation needed to be completed. When Bill met with the Chase representative in 2012 he was asked if he wanted to change his 2003 IRA beneficiary designation with regard to his (I will call it) ‘expanded investment’ IRA. Bill said that he wanted to keep his 2003 beneficiary designation for the ‘expanded investment’ IRA. For some reason Bill apparently never completed the new Chase adoption agreement with his ‘expanded investment’ IRA account in 2012, but Chase proceeded to open the ‘expanded investment’ IRA while continuing to rely upon Bill’s ‘old’ 2003 IRA beneficiary designation. Bill, a widower, died in 2015, two days after he signed a new Will, survived by six children. Shortly before Bill’s death he convened a family meeting with his children at which he expressed his intent that, excluding a couple of separate bequests, he intended to leave all of his assets, including those assets that were subject to beneficiary designations, equally among his children. Bill never changed the 2003 IRA beneficiary designation prior to his death. Chase determined that Julianne was the only named IRA beneficiary consistent with Bill’s 2003 IRA beneficiary form on file with Bank One.

Issue in Dispute: Julianne asked that her late father’s IRA funds be released to her, as she was the sole beneficiary of her late father’s IRA account (created in 2003 at Bank One, and expanded to permit other investments in 2012 when Chase was the then acting IRA custodian.)Bill’s Personal Representative challenged Chase’s determination, claiming that the 2003 IRA beneficiary designation was not an effective beneficiary designation for the 2012 ‘expanded investment’ Chase IRA, due primarily to Chase/Bill’s failure to follow the specified Chase policies and procedures in 2012 when Bill opened the ‘expanded investment’ IRA.

Probate Court: The probate judge ordered that Bill’s IRA funds to be released to Julianne pursuant to summary disposition motion, i.e. no evidentiary hearing was held, just affidavits considered by the probate judge before the ruling was made in Julianne’s favor.

Court of Appeals: The appellate panel, but with one dissent, upheld the decision by the probate judge. The dissenting judge felt that due to all of the changes Bill had made over the years with regard to his beneficiary designated accounts, many with different beneficiaries named, that an evidentiary hearing should have been held by the probate judge to determine Bill’s ultimate intent with respect to the Chase IRA.

Issue: The Court noted that the primary issue on appeal was whether Bill properly executed a beneficiary designation for his ‘expanded investment’ IRA at Chase, allowing title of that asset to transfer to Julianne outside of Bill’s probate estate, i.e. whether Bill’s 2003 designation of Julianne as beneficiary of his Bank One IRA was an effective beneficiary designation for his 2012 Chase ‘expanded investment’ IRA, thus permitting the nonprobate transfer of that asset to Julianne.

Law: The Michigan statute that controls the effect of the IRA beneficiary designation is MCL 700.6101. An edited version of that statute is summarized as: (1) A provision for a nonprobate transfer on death in an … individual retirement plan, or other written instrument of similar nature is nontestamentary. This subsection includes a written provision in the instrument that is intended to result in 1 or more of the following: (a) Money or another benefit due to, controlled by, or owned by a decedent before death is paid after the decedent’s death to a person, including a trustee of a trust created by will, whom the decedent designated either in instrument or in a separate writing, including a Will, executed either before or at the same time as, or after the instrument. Accordingly, an IRA beneficiary can be a person whom the decedent designates in the decedent’s Will.

Will Implements Beneficiary Change: While the Court was aware of Bill’s stated intent to leave all of his assets, even those subject to preexisting beneficiary designations, to all of his children equally,  as he announced in the family meeting just prior to his death, Bill never changed or formally revoke the 2003 Bank One IRA beneficiary designation. With regard to the above statute that addresses any writing, including a Will, used to change a beneficiary designation, the Court specifically noted on multiple occasions throughout its decision: “Although MCL 700.6101(1)(a) allows a beneficiary designation to be made in a will, the decedent’s will made no mention of his IRA.” Thus, a general residuary bequest to all of the owner’s children in shares of equal value did not override a prior IRA beneficiary designation without specifically identifying the IRA in the Will, or directing a change in a prior beneficiary designation.

Substantial Compliance with Procedures: Apparently Chase did not follow its own internal procedures when Bill opened the 2012 ‘expanded investment’ IRA (from what I could discern, a self-directed brokerage account in the name of the IRA.) From Chase’s failure to follow its own procedures the Personal Representative argued that the 2003 beneficiary designation was not a valid beneficiary designation with regard to the 2012 IRA brokerage account, i.e. the failure in 2012 to submit a ‘new’ adoption agreement (with beneficiary designation) along with the application for the ‘new’ Chasse IRA account. The 2003 Bank One IRA beneficiary designation was on file with Chase in 2012. Bill was asked in 2012 if he wanted to change beneficiary designation to be used in connection with his ‘new’ ‘expanded investment” Chase IRA and he responded to keep it as is. As a result, the 2003 Bank One IRA beneficiary designation form was submitted along with Bill’s 2012 ‘incomplete’ application to Chase. The Court found that Chase’s compliance division’s willingness to accept Bill’s ‘old’ 2003 Bank One IRA beneficiary designation was dispositive, not whether Chase complied with its own internal operations procedures. All that the Michigan statute requires is that Bill executed an instrument or separate writing that effectively designated Julianne as the beneficiary of his IRA brokerage account. Even if Chase did not follow its own procedures when Bill open the 2012 IRA, “beneficiary designations need only substantially comply with the provisions of the contract regarding designation beneficiaries for the nonprobate asset.

Bill’s Failure to Act: From the affidavits that were submitted to the probate judge it was clear, what Bill understood at the family meeting, that some of his assets, including the IRA, were subject to preexisting beneficiary designations. Although Bill may have intended to change or revoke those preexisting beneficiary designations, he did not take steps to change or revoke the designation on file with Chase, nor did he mention that intent in his Will. As a result, Bill’s stated intent to change the recipients of his IRA was insufficient to support the estate’s claim to the IRA: “An intent to change a beneficiary that is never executed is ineffective to deprive an account’s named beneficiary of the account funds.”

Conclusion: The result in this unpublished decision is not too surprising, particularly if Chase was prepared to honor an old and stale IRA beneficiary designation form with regard to a predecessor bank-custodian that it had later acquired, and not follow its own internal procedures when it accepted and relied upon that old beneficiary designation. Apparently Chase told Bill that it would rely on his preexisting 2003 IRA beneficiary designation with regard to his 2012 ‘expanded investment’ IRA at Chase.

It is possible, I suppose, that Bill’s other children (or his estate) might claim to be third-party beneficiaries to the Chase brokerage IRA contract agreement if they were the ‘default’ beneficiaries of the Chase IRA if Bill had failed to have a binding beneficiary designation attached to his Chase IRA brokerage account. However, that seems something of a reach, i.e. a default beneficiary has a claim against the IRA custodian for its failure to abide by its own internal policies?

Perhaps the more important point from this decision is that a Will, or other writing, can be effectively used to revoke or change a preexisting beneficiary designation, for either an IRA or for a transfer-on-death (TOD) or payable-on-death (POD), but the Will must clearly identify the IRA,TOD, or POD that has its existing beneficiary designation changed.

This is not a major decision by the Court of Appeals, but something to keep in mind when looking at the language used in a Will, or if a Will is being signed on the testator’s deathbed.