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Dispute Over a Retirement Account – Part 2

In my blog post last week I told you about a recent Wall Street Journal article that caught my eye.  Jeffrey’s siblings sued to recover their brother’s retirement account.  In 1987 Jeffrey designated his girlfriend at the time as the beneficiary of the account.  He broke up with her in 1989 but never changed the beneficiary so when he died the account custodian said they had to pay her.

That’s because the retirement account is considered contract property.  A will or when there is none  state intestacy laws, do not control contract property if there is a beneficiary designation on file with the account custodian.  Jeffrey’s siblings sued and lost but according to the WSJ article they intend to appeal.  Based on my experience I would say they are very unlikely to succeed.  It reminds me of a case years ago I was referred by another attorney who had tried and failed to do what Jeffrey’s siblings tried – to get a court to override the beneficiary designation.

The siblings sued Proctor and Gamble, the company that Jeffrey worked for, alleging it violated a fiduciary obligation to inform him of his beneficiary designation.  It isn’t clear from the article why they should have reminded him.   P&G said that when it changed service providers for its retirement plan it warned account holders that any previous beneficiary form on file would remain in effect unless changed by the account holder.  The monthly statements for the account contained a similar warning.

The siblings also made an equitable argument – that it is unfair for the former girlfriend, who had no relationship with Jeffrey after they broke up, to inherit the $1 million account leaving his family with nothing but a few thousand dollars of other assets.  Try as hard as Jeffrey’s family may, they can’t explain away the fact that Jeffrey could have changed the beneficiary designation at any time in the 28 years before he died.  It’s a lesson for all of us – we have an opportunity to designate who should inherit our assets but if we don’t exercise it our loved ones are left with a legal mess that usually doesn’t turn out well.

So you may ask why I took the case from the attorney who tried and failed to get the court to do the same thing.  It’s because I had a unique set of circumstances.  The account holder had gone to his attorney with a written list of assets and who he wanted them to be left to.  On that list was his 401k which he wished to leave to his second wife instead of his daughters.  

The attorney drafted a will containing a specific bequest of the retirement account as the client wanted.  I filed a malpractice action against the attorney who failed to advise the client that the account was not controlled by the will and that he needed to reach out to the account custodian to change his beneficiary form.  On the eve of trial, we settled the case and the wife recovered approximately 1/2 of the account.