Accidental Inheritance: Retirement Accounts and the Hidden Law of Succession

73 Pages Posted: 11 May 2013 Last revised: 7 Aug 2014

See all articles by Stewart E. Sterk

Stewart E. Sterk

Yeshiva University - Benjamin N. Cardozo School of Law

Melanie B. Leslie

Yeshiva University - Benjamin N. Cardozo School of Law

Date Written: April 2014

Abstract

Americans currently hold more than $9 trillion in retirement savings accounts. Those accounts, together with the family home, are the principal source of wealth for most working and retired Americans. But when a retirement account holder dies prior to exhausting retirement savings, what governs the distribution of the account? Most often, not the account holder’s will or trust, but a one-page fill-in-the-blanks beneficiary designation form that the accountholder filled out, typically without advice of counsel, when she or he opened the account.

When account holders fill out beneficiary designation forms, they are focused on starting a new job or beginning to save for retirement, not on estate planning. Yet the account holder’s beneficiary designations often trump express provisions in a will, trust instrument, prenuptial agreement or divorce decree -- documents prepared with inheritance in mind. Moreover, the account holder may neglect to change the beneficiary designation to take account of changed life circumstances, causing his or her retirement assets to pass to a beneficiary he or she never would have chosen later in life. To make matters worse, although wills doctrine has developed a set of constructional rules to deal with changes of circumstance, those rules do not generally apply to beneficiary designation forms. The current legal framework often frustrates the intent of the account holder.

This problem, which has already spawned a significant volume of litigation, will become exponentially worse over the coming decade, as more holders of substantial accounts reach the end of their life expectancy. Reform is critical. The financial intermediaries who currently draft beneficiary designation forms have little incentive to improve them because account holders and employers are unlikely to choose providers based on the quality of their forms. Federal and state legislation is necessary to ensure that these assets are distributed consistently with account holders’ intentions.

Keywords: retirement accounts, wills, estates, estate planning, probate

Suggested Citation

Sterk, Stewart E. and Leslie, Melanie B., Accidental Inheritance: Retirement Accounts and the Hidden Law of Succession (April 2014). New York University Law Review, Vol. 89, 2014, Forthcoming, Cardozo Legal Studies Research Paper No. 390, Available at SSRN: https://ssrn.com/abstract=2263234

Stewart E. Sterk (Contact Author)

Yeshiva University - Benjamin N. Cardozo School of Law ( email )

55 Fifth Ave.
New York, NY 10003
United States
212-790-0230 (Phone)
212-790-0205 (Fax)

Melanie B. Leslie

Yeshiva University - Benjamin N. Cardozo School of Law ( email )

55 Fifth Ave.
New York, NY 10003
United States
212-790-0266 (Phone)
212-790-0205 (Fax)

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