IRA Distribution Mishandled by Advisor

[JohnH]

The other string concerning mishandled IRA distributions generated a lot of conversation, so I'd like to throw out info on one I'm handling in case anyone wants to comment.

A person dies, leaving $150K in an IRA with his wife named as beneficiary. The financial advisor says the money was in funds which were too risky, so of course his solution is to move the money into what he considers less risky funds. (In looking at the previous and new funds I don't see much difference, but we're not here to talk about his possibly having other motivations for doing this).

So anyhow, the advisor sets up a spousal rollover and off they go. Except he forgot one little detail - the couple were divorced about 4 months prior to his death. This all happened in 2006, so now I'm the one telling him he goofed because it should have been a beficiary IRA subject to a separate set of rules, it can't be undone, and now she must pay tax on the full distribution plus pull it out of the new qualified plan..

I'm thinking his E&O carrier is going to have to step up to the plate for penalties, interest, my fees for straightening out the mess, excise taxes, and surrender fees. Has anyone ever had any success pressing the E&O carrier for some sort of adjustment for the presumed extra tax due to the higher marginal tax rate and loss of tax-deferred earnings, or is that just too far out to even attempt?

[erchess]

Lawsuit Happy

I would suggest to you that at the very least she should be able to recover the cost of having an experienced litigator take over all the conversations with the E and O company. Remember that the E and O company people you are dealing with are lawyers. Never bring a knife to a gun fight.

A lot of my friends think I am overly prone to ask for damages but I would personally get a lawyer and argue in front of a jury before I settled for less than all you said plus large punitive damages. I truly think this case cries out for an award that would all by itself leave the client comfortable for the rest of her days. On the other hand I have no idea how realistic it would be to suggest that she might actually get anything like this.which is precisely why a lawyer would be helpful.

[outwest]

Maybe..

you could win.

Or maybe the advisor will pull out the beneficiary form that says:
Beneficiary: Jane Doe
Relationship: spouse.

And Jane gets a letter asking what to do with this account, "of course I was his spouse when he set that up", maybe doesn't mention the divorce, who knows.

Sure the advisor could ask "You were still married when he died, right?" That ought to go over well with a grieving widow.

[JohnH]

Difficult to predict how this is going to go.

While it would seem somewhat heartless to ask a grieving widow if they are still married, the stakes are so high that it would seem to be mandatory to confirm the facts before moving someone out of one account into another. This is especially true since doing nothing would have avoided the taxable distribution problem entirely for either a spouse or a non-spouse (ignoring the investment risk question). They would have up to 5 years to make a considered decision not in the heat of the moment.

Regardless of his motivations, the situation looks as though he just chose to advise her to move to other investments with the commission in mind and failed to do his due diligence. Not saying that's why he did it, but it has that appearance. If the funds he moved her into turn out to have paid high commissions and/or to have surrender charges he may have a lot of explaining to do. I think the advisor has a big problem here.