I’m guessing that most people don’t take the time to read the fine print on life insurance or IRA change of beneficiary forms.  And why should they, since it seems pretty self-explanatory: I once put my wife’s name in this box, now I want to put my kids’ names in that box.  The reason why you want to pay attention to that fine print is because – to be effective – that fine print usually has to be strictly complied with.

In Smith v. Marez, the North Carolina Court of Appeals, applying New York law, ruled that a decedent’s failure to strictly comply with the change of beneficiary form requirements for his IRAs meant that the IRA assets went to his wife and not his kids.

So what did Leonard George Smith do wrong?

Leonard George Smith had two IRAs with Pershing LLC as the custodian on which he made the following beneficiary designations: Stefan Smith, 37.50%; Deborah Marez, 37.50%; and Diane Hill, 25%.  The next year, Leonard executed his Last Will and Testament in which he bequeathed $100,000 to his wife, Suzanne Furr Smith, and the residue of his estate to his children in the following percentages: Deboran [sic] Ann Smith Marez, 50%; Stefan Smith, 45%; Diane Hill, 5%; and Denise Smith, 0%.  On the same day he executed his will, Leonard executed new designation of beneficiary forms for his IRAs.  In the space provided on each form for listing beneficiaries, Leonard wrote “To be distributed pursuant to my Last Will and Testament[.]”  The problem for Leonard, however, was that cross-referencing his will was not permitted by the terms of the IRA agreements.

Since the IRA agreements contained a choice of law provision, New York law applied.  Although it does not expressly refer to IRAs, the North Carolina court applied New York Estates, Powers & Trusts Law § 13-3.2, which required the change of beneficiary forms to be in writing, signed by the decedent, agreed to by Pershing, and made in accordance with the rules prescribed for the IRA accounts.  While there has been some relaxation of strict compliance with the procedures specified in a contract for designating or changing beneficiaries, in the absence of any evidence that Pershing was not insisting on strict compliance, the terms in the IRA agreements required strict compliance.

The Pershing agreements required Leonard to designate a person, persons, entity or entities to receive the benefits.  Cross-referencing the will was not naming a person, persons, entity or entities.  Further, the one thing Leonard did correctly was check the box on the change of beneficiary form that stated “I hereby revoke all prior beneficiary designations . . . .”  Therefore, Leonard’s prior designation naming some of his children was revoked and, thus, there was no beneficiary designation on file with Pershing.  The assets in Leonard’s IRAs, therefore, ended up going to his wife and not his kids.

Granted, there were some unique aspects to this case.  For example, Pershing did not interplead the disputed funds.  Also, there was no evidence in the record as to what Pershing’s position was regarding strict compliance with the terms of its IRA agreements.  If Pershing had interpleaded the funds, Leonard’s children may have only had to show Leonard’s substantial – rather than strict – compliance with the change of beneficiary forms.  Likewise, had Leonard’s children generated some evidence related to Pershing, then Leonard’s intent, as demonstrated through his will, may have been relevant.