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‘Substantial Compliance’ Won’t Save Incomplete Change of IRA Beneficiary

WEINER LAWInsightsTrusts & Estates‘Substantial Compliance’ Won’t Save Incomplete Change of IRA Beneficiary

Trusts & Estates Saturday, July 1, 2023

Changes of beneficiary designation forms that were incomplete and rejected by the investment firm could not be resurrected by the concept of substantial compliance, the Appellate Division holds in affirming a trial court’s dismissal of claims by grandchildren.Trusts and Estates attorneys; fiduciary litigation lawyers | New Jersey | New York

Beneficiary Change Form Was Missing Account Numbers and Rejected by Investment Firm

The case Quick v. Morgan Stanley is a lesson in filling out important paperwork carefully and completely.  Ultimately, the case turned on how Morgan Stanley interpreted its own procedures, not on whether the owner of the Roth IRA account at issue had intended to do something differently.

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The deceased in the dispute, Frederick Quick, was married to Marie Quick.  The had one son between them, predeceased, and five grandchildren.  Frederick had two Roth IRA accounts.  in 2015, he completed a beneficiary designation form naming his five grandchildren as beneficiaries.

Deceased Submitted Incomplete Form

In 2017, after Marie died and in the apparent belief that she was a beneficiary of the IRA, he sought to change the beneficiary designation, but the form was incomplete. Quick had failed to include the account numbers to specify while account he wanted to change.  The plaintiffs, who discovered a copy of the incomplete form under which they would have received a greater share, sued to enforce the 2017 beneficiary designations.

While the appellate division gave considerable consideration to various evidentiary issues, ultimately the outcome was determined by Morgan Stanley’s procedures under the Uniform Transfer on Death Securities Act, N.J.S.A. 3B:30-1 to 3B:30-12.  Because the Roth IRA was a security that transferred on death outside of probate, the statute applied.

Statute Permits Financial Firms to Set Procedures for Beneficiary Changes

Under the statute a financial institution is permitted to “establish the terms and conditions” for designating or changing a beneficiary.  Morgan Stanley’s records showed that the 2017 had been rejected.

The plaintiffs argued that the principle of substantial compliance, which excuses technical non-performance to allow flexibility in applying a statute. The internal records of Morgan Stanley indicated that Frederick actually wanted to change the beneficiary designations and plaintiffs had not met all of the elements necessary to establish substantial compliance.

The elements are:

(1) the lack of prejudice to the defending party; (2) a series of steps taken to comply with the statute involved; (3) a general compliance with the purpose of the statute; (4) a reasonable notice of petitioner’s claim;  and (5) a reasonable explanation why there was not a strict compliance with the statute.

The trial court record failed to show general compliance with Morgan Stanley’s procedure for changing beneficiaries or of any explanation why there was not strict compliance.

Like the trial court, we are unpersuaded decedent substantially complied with Morgan Stanley’s procedures to change the beneficiaries. Because the beneficiary form was not properly completed, Morgan Stanley correctly rejected the submission by decedent, particularly in light of the notes reflecting decedent wanted to keep his existing beneficiaries.

Jay R. McDaniel