Tragedies Involving Individual Retirement Accounts: Four Cases Illustrate the Pain Resulting From Overlooking Simple Details

Many are shocked when they realize the consequences of retirement account owners overlooking basic details related to tax law and their accounts.

Review of recent legal cases helps drive home the points.

This case involved Jeffrey Rolison’s 401(k), who worked for Procter & Gamble for more than three decades and amassed an outstanding balance exceeding $754,000 in his account.

Rolison initially designated his live-in girlfriend as beneficiary when he registered for his 401(k). They separated two years later.

Rolison had an informal romantic relationship from 2002 through 2014 with one of her co-workers and named her as his beneficiary of life insurance and health benefits, yet never nominated her to benefit from his 401(k).

Rolison died in 2015 with his former flame as sole beneficiary, so the 401(k) administrator paid out her share. Rolison’s brothers filed suit as co-executors of his estate stating benefits should have gone towards it instead.
The second girlfriend filed suit, alleging her status as beneficiary for Rolison’s life insurance and health benefits indicated it was intended that she receive her share. But her suit was dismissed; as no beneficiary existed nor legal rights could give rise to expectations regarding access.

Procter & Gamble was accused of violating its fiduciary duties or being negligent by failing to notify Rolison that she remained beneficiary of his 401(k).
However, Rolison could show evidence of receiving numerous notices over time from his company informing him to check who was listed as beneficiary and make any necessary changes – these notices also contained instructions for accessing their account online.

Court ruling determined an employer was not required to inform an employee who they listed as beneficiaries specifically, since Rolison had access to his 401(k) account several times and could easily review and update this designation himself.

The Estate lost in court, giving away most of Rolison’s 401(k) balance to former girlfriend. Additionally, significant costs associated with litigation likely outweighed benefits (Procter & Gamble U.S. Business Services v Estate of Jeffrey Rolison: Case #3:17-cv-00762, M.D. Pa).
Case with similar complications involved the estate of a deceased 401(k) owner – his second spouse and children from their first marriage were designated joint beneficiaries on his account after death.
Subsequent to being acquired, their employer was later taken over by another firm and their 401(k) assets rolled over into accounts at their new company’s 401(k).
Apparently, the owner neglected to update her beneficiary designation with her new employer’s 401(k) plan; under its rules if this occurred then their spouse, should they survive them, would become sole beneficiary.
After an employee passed away, his plan administrator informed his widow she was the sole beneficiary and filed a claim with her children; this claim was then denied by him and sent before a court for resolution.
Previous actions and the terms of his will showed that the deceased intended his children to inherit all or most of his assets; however, in terms of qualified retirement plans only their most recently designated beneficiary matters.
Children also argued that their beneficiary designation from their previous employer should have been applied; however, given that there wasn’t any merger of plans involved between employers, a separate beneficiary designation for this new plan had to be put in place by each one of them.
Court ruled in Kinder Morgan vs. Crout (5th Cir. No. 19-20037) to make her sole beneficiary. Many are surprised at their powers as administrators or trustees for retirement plans or individual retirement accounts (IRA), such as being able to close an account early, distribute assets accordingly and trigger taxes against its owner.
One IRA owner moved without informing their custodian; without receiving notification of this new address change, their custodian sent out a letter notifying the previous address that he or she was withdrawing as custodian due to lack of activity within their IRA and contact with its owner. In response to this situation, an inactive account and unanswered calls led the custodian to send another letter notifying him/her they were leaving due to lack of engagement between parties involved and an attempt at reaching them failed and hence his/her resignation due to lack of contact and inactivity on both parties involved resulting from inactive accounts with accounts being maintained within.
As soon as no response was forthcoming from its owner regarding what should happen with their account, its custodian took steps to distribute any balance by notifying issuers of securities held within it to change from custodial ownership back into being owned directly by an account holder.
Custodian issued 1099-R to report distribution. Paperwork was delivered directly to owner without notifying IRA owner of it being done so.
IRS had access to his current address and sent an assessment notice regarding additional taxes owing for not including an IRA distribution in their gross income calculation.
After consulting his CPA and filing extensive paperwork, an IRA owner rolled their distributed assets over to another IRA account. His CPA then asked the IRS in writing to waive its 60-day limit for tax-free rollover transactions and accept this rollover transaction as tax free.
IRS decided in the IRA owner’s favor, so no additional taxes or penalties were assessed against him; but to get there he needed to undertake much hard work, pay his CPA fees, and incurring the $10,000 IRS ruling request fee.
As previously discussed by me, events surrounding late actor James Caan had less positive outcomes and I outlined these events here.
An important lesson about IRA custodianship can be seen when one considers that, at any point, its custodian can voluntarily choose not to serve or resign under specific conditions discussed within an IRA document that few actually read – which allows it to close an account and distribute assets without needing approval by its owner.
An industry standard specifies that an IRA custodian may resign and close an IRA account 30 days after notifying its owner; giving this timeframe for them to change custodian.
If the custodian does not hear from an IRA owner within 30 days, their account will be closed and their balance distributed accordingly – usually by sending a check directly or transferring legal title for stocks or mutual funds into their name.
Custodial banks must submit Form 1099-R to both the IRS and owner as evidence of distribution from account balance.
Unless rolled over within 60 days of distribution to an eligible retirement account, an IRA owner will need to include that distribution amount as gross income in their taxable income for that year.
Sometimes assets may have been transferred to an unclaimed property fund and must now be claimed back from this process by their rightful owners.
Make sure that both of your IRA custodian and 401(k) administrator have your current address. Read all communications from them carefully, noting any instructions and deadlines they include and ensure a prompt reply is given when possible.