Seven years after his death, Dr. Ed Lyon’s carefully planned legacy remains frozen in legal limbo, serving as a stark reminder that even the most thoughtful estate plans can unravel over a single piece of paperwork.
A Physician’s Vision for His Grandchildren
Ed was a pioneering urologist at the University of Chicago. In 2014, Ed and his wife, Val, updated their estate plan. As part of the update, he intended his retirement account, worth approximately $1.2 million at the time of his death, to be divided equally among his 36 grandchildren through separate trusts, taking advantage of tax law at the time that allowed individuals who inherited retirement accounts prior to 2020 to stretch out required distributions over their lifetimes. This arrangement would have provided each grandchild with decades of tax-deferred growth.
Ed worked with an estate attorney to draft a comprehensive plan and allegedly received clear instructions to update the beneficiary designation on his Teachers Insurance and Annuity Association of America retirement account held through the University of Chicago.
The Beneficiary Form
The trouble began when Ed was ailing, and his wife, Val, was incapacitated. A family member, acting under power of attorney, went online to check the account status. The website displayed the beneficiary information as “on file,” suggesting everything was in order. However, when they called to confirm, there was no record of any beneficiary update.
The family member then completed a new beneficiary designation form, attempting to change the beneficiaries to the 36 grandchildren and including what they believed was a proper waiver of Val’s spousal rights to the account.
The Spousal Waiver Problem
TIAA rejected the beneficiary designation. The issue centered on the spousal waiver, which is the document that would allow Ed to bypass his wife as the automatic beneficiary and instead name his grandchildren.
Under federal law and Wisconsin state regulations (the Lyons resided in the state), a spouse typically has automatic rights to retirement accounts. To override these rights requires explicit, properly executed documentation. The University of Chicago and TIAA argued that the waiver wasn’t explicit enough to cover Val’s spousal rights to Ed’s IRC Section 403(b) account, citing Wisconsin law requirements.
Despite the family’s attempts to resolve the situation, TIAA maintained its position that it couldn’t process the form due to improper execution.
TIAA argued that it bears no responsibility for negligence regarding incomplete paperwork. It’s simply following the legal requirements for beneficiary designations.
What’s at Stake?
The consequences of losing this legal battle extend far beyond delayed inheritance. If the family loses in court, the funds, now worth approximately $1.7 million, would likely be distributed to Val’s estate rather than directly to the grandchildren. While the grandchildren would eventually receive their inheritance through Val’s estate, they would be stripped of crucial long-term tax advantages that were central to Ed’s original plan. The SECURE Act eliminated the “stretch IRA” provision in 2020 for most non-spouse beneficiaries under the SECURE Act.
If the grandchildren had received the inheritance as Ed intended, they would have been grandfathered under the old, more favorable rules. Now, even if they ultimately receive the money, they’ll be subject to the less advantageous current tax treatment, potentially costing the family hundreds of thousands of dollars in additional taxes over time.
“This result could have been avoided by not waiting until the last month to update the beneficiary designation or specifically authorizing this power in a power of attorney,” says Patrick D. Owens, partner in Buchalter’s Chicago office and a member of the Tax, Benefits & Estate Planning and Litigation practice groups.
“Another option would have been to potentially roll over the retirement plan to an individual retirement account. Because an IRA isn’t subject to the Employee Retirement Income Security Act, no spousal consent would have been necessary for federal purposes, although both Ed and his wife appear to have been Wisconsin residents, which adds the further complication of a marital property state, which may have still required spousal involvement,” Owens explained.
A Cautionary Tale
This case highlights the importance of making sure clients have all their documents up to date and in place. There are other cautionary tales involving beneficiary designation forms, such as the case of an individual who inherited from an ex they split with decades earlier.
“It’s easy to forget that retirement and insurance assets pass outside of probate. This means that even the most sophisticated estate plans, complete with a last will and testament or inter vivos trust, could easily fail if beneficiary forms are not completed correctly (including the all too important, state-specific, marital waiver),” said Peggy Sizow, Chief Fiduciary Officer at National Advisors Trust. “These asset types are often custodied separately from a client’s main portfolio, managed by an employer, or evidenced only by a policy tucked away in a rarely visited safe deposit box,” Sizow added.
“To ensure that a client’s intentions are honored after death, estate planners need to ask the right questions that will enable them to review all facets of a client’s wealth portfolio, including the beneficiary designation forms of those non-probate assets,” suggested Sizow.
Estate planners should advise clients to revisit their beneficiary designations whenever they make any updates to their will or on the occurrence of any life changes (for example, marriages, divorces, births, deaths), to ensure the estate plan aligns with other forms.
Unlike other cases that have made headlines, what stands out in this situation is that all the family members agreed on the changes to the plan and supported the intended designation. This wasn’t a case of cutting out an heir (the wife) from an inheritance. Nevertheless, the university and the TIAA argue that they’re simply bound by the letter of the law.
