JANUARY 6, 2014 VOLUME 21 NUMBER 1
Here’s an estate planning question we get asked a lot: if you have created a revocable living trust and transferred essentially all of your assets to the trust’s name, should you also make the trust beneficiary of your IRA, 401(k) and other retirement accounts? It’s a great question, and difficult to answer without referring to your own situation. Does your trust continue for the benefit of children or grandchildren? Are there charities named as beneficiaries in your trust? Are you single? If you are married, is the trust a joint trust between you and your spouse? Do you have an estate large enough to be taxable? Are your children about the same age, or is there a significant age span among them? Are they going to receive your estate in equal or unequal shares? All of those questions and a few more are important when deciding whether to make your trust the beneficiary of your IRA.
We were thinking about this issue while reading a recent case decided by the Arizona Court of Appeals. It involved a substantial IRA and a change in the precise language of the beneficiary designation shortly before the owner’s death. The case ultimately turned on the evidence of the owner’s actual intention, but the unintended ambiguity introduced in the beneficiary designation should give every IRA owner (and every estate planner) pause.
Frank Merriwether (not his real name) married Melissa late in life, after the death of his first wife. Melissa died, tragically, of breast cancer just five years after their marriage. Frank wanted to leave something to the Arizona Cancer Center in Tucson, hoping that research into breast cancer causes and treatment might make a difference in the future.
Frank and Melissa had established a joint trust which, upon Melissa’s death, divided into two separate trusts. One, the “Survivor’s Trust,” could be amended by Frank. If he did not amend it, the Survivor’s Trust indicated that fixed dollar amounts would be divided among several recipients, including $100,000 to the St. George Antiochian Orthodox Church. After those specific distributions, the residue of Frank’s share of the trust would be distributed to a “Charitable Trust” described in the trust document — a trust set up as charitable lead trust.
Shortly before Melissa’s death, Frank changed the beneficiary designation on his IRA account to name Melissa as first beneficiary, and the “[Merriwether] Charitable Trust as specified in [the trust document]” as contingent beneficiary. After Melissa’s death, he changed the beneficiary designation to the “[Merriwether] Charitable Trust as specified in para 8 of [the trust document].” Part of his thinking, according to the financial adviser who handled his IRA, was that he could make future changes in the beneficiary designation by amending his trust, without having to fill out the paperwork with the stock brokerage acting as IRA custodian.
A few years later Frank’s financial adviser changed firms. As part of the shift to the new brokerage company, Frank’s beneficiary designation was changed to the “charitable organizations as called out in the [Merriwether] Survivors Trust UAD 6-1-2005.” That, according to Frank’s stockbroker, was intended to refer to the charitable trust in Frank’s trust document, and to, again, allow him to make beneficiary changes without having to fill out the beneficiary designation form. Shortly after that form was completed, Frank amended his trust to make the Arizona Cancer Center the sole beneficiary of the charitable trust. Frank died just six weeks later.
As successor trustee of the trust, Frank’s nephew made a distribution of $100,000 to the St. George Antiochian Orthodox Church. The Church, however, argued that it was one of the “charitable organizations as called out in the” Survivor’s Trust, and should share in part of the rest of the distribution. The trustee disagreed, and the dispute went to court.
The trial judge ruled that the beneficiary designation was ambiguous, and that it could consider other evidence of Frank’s intention in deciding what the designation meant. With the testimony of his stockbroker, it was clear that Frank intended the money to go to the Arizona Cancer Center, and the judge ordered the trustee to follow his wishes. St. George Antiochian Orthodox Church appealed.
The Arizona Court of Appeals upheld the trial judge. The appellate judges agreed that the evidence of Frank’s intention was clear, after consideration of his stockbroker’s testimony. The only real question was whether it was permissible to consider that evidence. The general rule of law, ruled the appellate court, is that you look only to the written documents to determine intent — unless the evidence is ambiguous, in which case you can consider other evidence. In this case, the language of the beneficiary designation created an ambiguity that permitted the stockbroker to explain Frank’s wishes. The church lost, and was even ordered to pay a portion of the University of Arizona’s legal fees. In the Matter of the Estate of Maynard, November 21, 2013.
We always try to extract deeper meaning from the appellate cases we describe. Is there a broader lesson for someone in Frank’s position, or for the stockbroker, or for the lawyer (we can only assume that a lawyer was involved) who prepared Frank’s estate plan? Perhaps we can suggest a couple of points:
- When changing beneficiary designations — even if it is a simple change occasioned (as Frank’s was) by a change from one IRA custodian to another — it might make sense to send the new beneficiary designation to your lawyer for review and suggestions. Frank’s earlier beneficiary designations looked much better than the final one, and his lawyer might have made a simple suggestion that could have saved tens of thousands of dollars in legal fees.
- When naming a trust as beneficiary of an IRA, it is easier if you can name the entire trust, perhaps like this: “The Jones Family Trust Dated ______, as it may be amended from time to time.” Of course, that wouldn’t have accomplished Frank’s intention. If a sub-trust of the Jones Family Trust is being named as beneficiary, it makes sense to give it a name in the trust document and then refer to that name. That’s essentially what Frank’s first beneficiary designation did, and the second one was even better.
- When you are leaving a substantial IRA to a sub-trust, you might consider creating a separate, stand-alone trust. If, for example, Frank had created the Merriwether Charitable Trust Dated ____, his main trust could then have left a share to that trust — and his IRA beneficiary designation could have named that separate trust, leaving no room for ambiguity.
Of course, all of this assumes that it is appropriate to name the trust as beneficiary of the IRA in the first place, and that isn’t always the case. That takes us back to our opening observation — this question is very fact-specific, and be very careful about how you handle beneficiary designations.