May 1, 2013
IRA Beneficiaries

by Justice Paul E. Pfeifer

On December 16, 2009, John F. Burchfield committed suicide. His death set off a dispute over his Individual Retirement Accounts (“IRA”) that eventually made its way before us – the Supreme Court of Ohio.

John actually had two IRAs that were being held by Wells Fargo Advisors, L.L.C. In 2002, John designated his mother, Gloria Welch, and his stepfather, Bruce Leland, as beneficiaries. Gloria was to receive 75 percent and Bruce 25 percent in the event of John’s death.

That all changed in May 2007, when John married Cynthia Burchfield. Shortly before the marriage, John designated Cynthia as the sole beneficiary on both accounts.

Alas, the marriage did not last long. On October 28, 2009, John sent an e-mail to his Wells Fargo advisor, Aaron Michael, stating that he and Cynthia were getting divorced. He requested paperwork to remove Cynthia as the beneficiary on his IRAs.

Thereafter, by telephone, John gave Michael specifics regarding a change in the beneficiary designation for the IRAs.  Michael prepared change-of-beneficiary forms that again designated Gloria and Bruce as the beneficiaries. John’s sister, Lori LeBlanc, was listed as the contingent beneficiary. Michael predated the forms “November 2, 2009” and mailed them to John, along with a self-addressed, stamped envelope.

On November 2, 2009, Cynthia filed a divorce complaint against John. Around the same time, John spoke with Michael and told him that the change-of-beneficiary forms were “already taken care of.” Then, about six weeks later, John committed suicide. He left a note that contained a postscript in which he expressed his love for Cynthia.

After his death, John’s sister Lori asked Michael to look through John’s financial documents to settle his affairs. In January 2010, Michael and one of John’s co-workers discovered the signed change-of-beneficiary forms in an envelope among John’s papers.

Michael gave the forms to his manager at Wells Fargo. Soon after, Cynthia, Gloria and Lori made conflicting demands of Wells Fargo for the IRA proceeds. John’s stepfather disclaimed any interest in the IRAs.

In March 2010, Gloria and Lori filed a complaint against Wells Fargo and Cynthia, seeking a declaration that Cynthia was not entitled to the proceeds of John’s IRAs. In turn, Cynthia sought a counter declaration that she, as the beneficiary named on the form in Wells Fargo’s possession at the time of John’s death, was solely entitled to the proceeds.

In response, Wells Fargo filed an “action in interpleader.” That term simply refers to a situation in which two or more people claim the same thing of a third – in this case, an IRA – and the third, who lays no claim to it himself, is uncertain as to which of the other two has a right to it.

In filing the interpleader, Wells Fargo represented that it was “unable to determine the validity of the conflicting demands.” Wells Fargo disclaimed any interest in the proceeds of John’s IRAs and offered to deposit the funds with the court’s clerk or to maintain the account until the dispute was resolved.

The case went to the trial court, which granted summary judgment to Cynthia because she was the beneficiary designated on the form in Wells Fargo’s possession at the time of John’s death.

When the case was appealed, the Second District Court of Appeals affirmed the trial court’s ruling. In doing so, it emphasized that John had not complied with Wells Fargo’s policy, which required that change-of-beneficiary forms be returned to the company. It also concluded that Wells Fargo had not waived compliance with its change-of-beneficiary procedure by filing an action in interpleader.

In reaching that conclusion, the Second District rejected the Ninth District Court of Appeals’ decision in a similar case from 2008, which held that an IRA custodian waives compliance with its change-of-beneficiary procedures when it interpleads disputed funds. In that case, the Ninth District also held that the account holder’s clearly expressed intent is the controlling factor in a dispute.

According to the Second District, John’s failure to return the forms to Wells Fargo constituted a failure to substantially comply with Wells Fargo’s procedure, and that failure was fatal to Gloria and Lori’s claims, without regard to John’s actual intent.

The case then came before us for final consideration. The Second District had concluded that Wells Fargo’s requirements for a change of beneficiary was the controlling factor, and “because John did not comply with them, he did not change the beneficiary before his death.”

The Second District also concluded that even if John had otherwise clearly expressed his intent to change his beneficiary, his failure to return the forms was a failure to substantially comply with the policy.

As mentioned earlier, the Ninth District had reached a different conclusion in a similar case in 2008. In that case, the Ninth District applied our court’s holdings in cases dealing with life-insurance-policy proceeds and justified doing so because life-insurance policies and IRAs share a significant feature – they both “typically include a procedure for designating and changing beneficiaries.”

The Ninth District explained that “it has long been the rule in Ohio that those procedures are intended to protect the insurer from duplicate liability and the insurer is free to waive” the procedures.

We determined that the Ninth District’s rationale and holdings represented the better-reasoned view. We concluded that the IRA change-of-beneficiary procedures are intended to protect the IRA custodian, and the custodian alone.  Therefore, a custodian is free to waive the procedures by filing an action in interpleader against the claimants.

We also adopted the “clearly expressed intent” test from our insurance cases. Therefore, if an IRA custodian files an interpleader action, and the account owner’s intent to change beneficiaries was clearly communicated to the custodian, the proceeds will be paid to the newly designated beneficiary rather than to the original beneficiary.

We thus reversed the Second District’s judgment by a seven-to-zero vote. And, because there is a genuine issue of fact as to the clearly expressed intent of the account holder, we sent the case back to the trial court for trial.

EDITOR'S NOTE: The case referred to is LeBlanc v. Wells Fargo, 134 Ohio St.3d 250, 2010-Ohio-5458. Case Nos. 2011-2160 and 2011-2073. Decided November 28, 2012. Majority opinion written by Chief Justice Maureen O'Connor.