One of the biggest advantages to executing a well-crafted estate plan is to avoid the need for probate altogether. By utilizing certain strategies, your estate can completely bypass the probate court, and save your intended beneficiaries thousands in court costs and legal fees. While many people believe this can be done only through complex legal instruments, such as Revocable or Irrevocable Trusts, there are other strategies as well that can aid in the distribution of your estate depending on your specific goals.

One such strategy is making and updating beneficiary designations on all bank accounts, retirement accounts, investment accounts, and life insurance policies. These are often referred to as Pay-On-Death (POD) or Transfer-On-Death (TOD) designations. Any accounts that have a beneficiary designation pass directly to the named beneficiary upon death, without the need for probate. While these designations by no means supplant the need for a full estate plan, they are a viable tool that can be used in conjunction with your other estate planning documents.

However, it is vital to emphasize a word of caution. Beneficiary designations are not a set-it-and-forget-it activity. Nor are they automatically updated when you execute or revise any other portions of your estate plan. The Suffolk Superior Court articulated this word of caution loud and clear in a recent decision, Charles Schwab & Co, Inc. v. Kamio, et al.

Background on the Case

In 1991, Michael Kamio opened a Charles Schwab IRA account and named his parents as the co-beneficiaries, and his sister, Mariko, as the contingent beneficiary. Later in 2000, Michael contacted an attorney to aid him in amending his estate plan. By the time Michael hired the attorney, he had married his wife and now widow, Elizabeth, and he and Mariko had not spoken since 1996.

While revising the estate plan, Elizabeth argued that Michael attempted to name her as the IRA beneficiary, and submitted to the court screenshots that read, “SUBMITTED CHG OF BEN ON IRA ACCT SET FORM TO BE PROCESSED.” Charles Schwab, however, had no signed beneficiary designation forms on file, which is required to formally change a beneficiary based on their internal policies.

As a result, when Michael passed away in 2019, with both of his parents predeceasing him, his wife, Elizabeth, and his estranged sister, Mariko, both made competing claims to the proceeds of the IRA. The Court ruled in favor of Mariko, the estranged sister, holding that there was not enough evidence to support a finding that Michael had satisfied all of the requirements for changing the IRA beneficiary designation. The Honorable Judge Adam Hornstine wrote in his opinion that Elizabeth, “could offer no specific memories, let alone any admissible, non-speculative evidence that would buttress this belief (that Michael properly filled out the beneficiary change form).”

While the ruling is harsh, it is ultimately fair, as it requires full, unequivocal compliance with the brokerage house's procedures for updating beneficiary designations. Such compliance ensures that the distribution to the named beneficiary is predictable, and predetermined before the death of the decedent.

As a result, Michael’s estranged sister, rather than his wife and the mother of his three children, will receive the full amount of the IRA account.

The Attorneys representing Elizabeth have filed a notice of appeal following the decision, and we will keep you updated as more information becomes available. 

Key Takeaways from the Decision

This case is a cautionary tale that any beneficiary designations on file with a given institution will prevail over all other claims, regardless of the decedent’s actual relationship with the named beneficiary on file. Beneficiary forms and change of beneficiary forms on retirement accounts and life insurance policies must be submitted and signed in accordance with the specific institution’s rules and policies. Failure to strictly comply with the institution’s procedures could have severe ramifications, such as the outcome in the Kamio case.

The decision serves as a reminder to all account holders to consistently review their IRA, 401(k), and life insurance contracts to ensure substantial compliance with naming or changing beneficiaries. Equally as important is the need to document any changes and the steps that were taken to demonstrate that the required procedures were in fact complied with. A key factor in the Court’s ruling in favor of Marika, was Elizabeth’s lack of admissible evidence, specifically any paper trail or other concrete proof that Michael had successfully completed the process of changing beneficiaries.

If you haven’t reviewed your beneficiary designations, or don’t have any set at all, now is the time to review all of your accounts. Especially if you have recently experienced any major life changes such as marriage, divorce, or the birth of a child.

If you are in the process of reviewing your estate plan and your beneficiary designations, contact our experienced estate planning attorneys today to ensure that you and your loved ones are adequately protected.

This blog is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By reading this blog you understand that there is no attorney client relationship between you and Lane, Lane & Kelly, LLP.