Your organization has been named a payable on death beneficiary of an investment account valued at more than $1.2 million. Your supporter assures the chief development officer this arrangement will be a probate-free way to support the organization. What might possibly delay receipt of the gift? It turns out, a lot!! The recently decided case of U.S. Bank v. Beck¹ reminds us that traps for the unwary exist in some of the simplest gift arrangements.

In U.S. Bank v. Beck² the U.S. District Court for the Eastern District of Missouri resolved a dispute over an investment account’s transfer on death (TOD) registration.

In 2012, the decedent had signed a custody agreement with U.S. Bank and a TOD designation naming the Opera Theater St. Louis as sole beneficiary. At the time of the decedent’s death in 2019, the beneficiary claimed ownership by virtue of the beneficiary designation, which had remained unchanged since 2012. The executor, Ms. Beck, had been unaware of this account during the decedent’s lifetime and argued the account was an asset of the probate estate. The bank filed an interpleader action asking the U.S. District Court to determine the owner and to discharge it from liability and dismiss it from the lawsuit. The court granted the bank’s motion, meaning the funds were held by the court until a determination regarding where the funds should go was made. The court also dismissed the bank as a party to the litigation and discharged it of any liability.

In earlier rulings, the court rejected the argument of the executor that the charity was not entitled to the account. The executor had argued the payable on death account could pass only to a natural person within the meaning of the custody agreement and TOD forms. Since the charity was not a natural person under Minnesota law, the funds should pass through the probate estate.

The U.S. District Court for the Eastern District of Missouri acknowledged that, while Minnesota law applied since the TOD account so designated it as governing, the bank exercised its discretion to ignore the natural person limitation. The court also noted Minnesota probate law does define a person as including individuals, corporations, organizations or any legal entity.

As you might expect, the litigation over which state’s law applied generated legal fees of nearly $33,000 as part of litigating the interpleader action.

How much was reasonable? The court awarded approximately $17,300 in legal fees requested, notwithstanding that neither charity nor executor filed an objection to the bank’s request.

What are some lessons learned? Well certainly, testators should keep their executors informed about all assets, even non-probate. One wonders whether the executor would have interfered had she known of the existence of the account before the decedent’s death. Additionally, a charity should be familiar with the terms of the applicable state law governing transfer on death accounts. A simple way of giving can turn out to be complicated.

By Professor Christopher P. Woehrle, JD, LLM

Endnotes

1. U.S. Bank v. Beck, No 4:20-cv-01847 (E.D. Mo. 1/12/2022).
2. Ibid.