Sometimes failing to read the fine print in the IRA Account Agreement can have disastrous results, since the terms contained in the fine print of such Agreements on some pretty important points can vary greatly. In Smith v. Marez, Case No. COA11-475, NC Ct. App. , December 6, 2011, the IRA owner, Leonard Smith, opened two IRAs with Pershing LLC, signing a Traditional IRA Adoption Agreement for one and a Rollover IRA Adoption Agreement for the other, in each case adopting the terms of the applicable Account Agreement governing the terms of the IRA and designating his children as the beneficiaries. A year and a half later, after having been diagnosed with cancer, he signed a new Will designating his children in different proportions and new beneficiary forms on which he stated that the IRAs are “to be distributed pursuant to my Last Will and Testament.” Two weeks later, Leonard married Suzanne, and died two months after the marriage.

Suzanne Smith, individually and as executrix of Leonard’s estate, filed a complaint against Leonard’s children, alleging that the IRAs were properly payable to her and not the children or the estate. (Interestingly, there is no discussion of her conflict of interest between her position in this case and her duties to the estate and the children as the beneficiaries of the estate, in her capacity as the executrix.) The children defended on the basis that they were the beneficiaries and should receive distribution based on the percentages set out in Leonard’s Will, or in the alternative, the IRAs should be distributed according to the provisions of the Beneficiary Designation signed by Leonard when he set up the IRAs. The trial court granted summary judgment to Suzanne, ruling that the IRAs belonged to her as Leonard’s surviving spouse.

The children argued that the beneficiary designation change substantially complied with the provisions of the IRA Agreements and were accepted by Pershing. However, the Pershing IRA Agreements require one or more persons or entities to be named as the beneficiaries and did not permit the designation of a beneficiary by cross-reference to another document. If Leonard was found not to have named a beneficiary, the Pershing IRA Agreements provided that the default beneficiary was the surviving spouse.
The IRA Account Agreements adopted New York law as the applicable law. The court determined that New York law requires strict compliance with the provisions of the Pershing IRA Agreements, unless Pershing has waived that requirement, which the Court determined Pershing had not done (or at least there was no indication in the record that Pershing had waived the strict requirements of the Agreements).

The court then addressed the children’s alternative theory that the prior beneficiary designation should control the disposition of the IRAs, under the Doctrine of Dependent Relative Revocation. Thus, they argued that Leonard would not have revoked the original Beneficiary Designations if he had known that the new Beneficiary Designation would fail. However, the court found that, while New York had adopted the Doctrine of Dependent Relative Revocation, it had previously been applied only in the Will context. The court refused to extend the doctrine to beneficiary designations.

Finally, the children argued that the doctrine of incorporation by reference should apply. The court declined to do so on the basis that this would not constitute strict compliance with the Pershing Agreements and because incorporating Leonard’s Will into the Beneficiary Designation form would not clear up who the beneficiaries of the IRA should be, as there were specific legatees in the will, including the surviving spouse, and the will makes no mention of the IRAs.

Unfortunately, Leonard’s wishes that the IRAs pass to his children in certain percentages would not be honored because he did not name them directly in the Beneficiary Designation form, and he did not designate his estate as the beneficiary, which also would have worked. It is also interesting to note that under many IRA Account Agreements of other plan sponsors, the estate is the default beneficiary. Here, Pershing was trying to be helpful by including in the Account Agreement a default beneficiary other than the estate.