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Retirement Planning > Saving for Retirement > IRAs

Schwab Files Complaint in Fight Over Inherited IRA

By Dinah Wisenberg Brin

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What You Need to Know

  • An inherited Roth IRA is at the center of a dispute after a client requested a beneficiary change days before dying.
  • Schwab, the custodian, filed a complaint to prompt the parties to litigate the matter.
  • The case can serve as a reminder to advisors about the importance of updating beneficiary designations.

A dispute over the inheritance of a Roth IRA held with Charles Schwab & Co. may serve as a reminder of how important it is for investors to keep up to date on their desired beneficiary designations.

The financial services giant has asked a federal court in Wisconsin to require the two parties with claims to the retirement account to litigate the matter between themselves and relieve Schwab of liability.

The company laid out details in late June in its “interpleader complaint,” a legal action in which a party holding property it doesn’t own sues to prompt those claiming ownership to litigate the matter.

Schwab client Charles J. Hayes, while living, owned a Roth IRA, recently valued at roughly $38,300, that listed a sister as the only beneficiary, the filing says. On Jan. 21 this year, nine days before he died, Hayes called Schwab and asked to change the beneficiary, according to the complaint.

The company asked Hayes to fill out paperwork online or in writing before it would process the request, a standard Schwab policy applicable to all account holders, Schwab said in the complaint.

When Hayes died on Jan. 30, he hadn’t completed the required paperwork to change the beneficiary, and so his sister remained the sole beneficiary, according to the complaint. Schwab created an inherited IRA in her name and transferred the funds from Hayes’ account, it says.

In May, Schwab received a letter from a lawyer representing Hayes’ estate asserting the estate was entitled to the proceeds and that it intended to pursue legal action if the financial services company didn’t send the funds to the estate’s personal representative or to a trust account in the lawyer’s name.

According to the letter from Steven Garbowicz, the attorney for Hayes’ estate, Hayes had the Roth IRA and a savings account at Schwab, and before he died asked the company to cash out the IRA, close the savings account and send him a check for the amount contained in the two accounts.

“Unfortunately the Roth IRA was closed and sold. The check was never issued to the decedent for the Roth IRA. They never closed out the bank account and your company is now taking the position that there is some beneficiary named who is now entitled to these funds. This is an explicit violation of his direction to you as to what he wanted to have happen with his money,” Garbowicz said in the letter, which Schwab included with the complaint.

If Schwab doesn’t send the funds to the estate, the letter says, “we will be seeking other legal counsel to pursue this matter as this was a complete and total breach of your company’s duties to the decedent based upon his request.” Garbowicz noted that the estate had filed a formal probate in county court.

Since the sister and the estate have both laid claim to the proceeds from Hayes’ account, Schwab said in its complaint, “Schwab is therefore uncertain as to whom it should pay the proceeds of the account. As a result of the conflicting claims … Schwab cannot distribute the account proceeds to either party without risking liability. Schwab is thus exposed to double or multiple jeopardy.”

Schwab contends it is entitled to be discharged from liability and that Hayes’ estate and his sister should be required under federal law to interplead their respective claims to the account. 

The company seeks an order discharging it from liability with respect to the account, upon Schwab submitting the IRA proceeds with the court clerk, and awarding Schwab’s attorneys’ fees from account proceeds.

When asked for comment, a Schwab spokesman referred ThinkAdvisor to the language of its complaint. Garbowicz didn’t immediately respond to an email seeking comment.

Dinah Wisenberg Brin

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