Reversing the lower court, the Illinois Appellate Court, Fifth District, recently ruled that under the Uniform Commercial Code and the Illinois Trust and Payable on Death Accounts Act, a change in the designated beneficiary of a payable-on-death account was effective if the account holder manifested her intention to change the beneficiary designation "during his or her lifetime," and the written instruments used to manifest that intention were "accepted by" the financial institution.
In so ruling, the Court noted in part that the "during his or her lifetime" limitation for making the change applied only to the actions of the account holder, and not to the time of acceptance of the written instruments by the bank.
A copy of the opinion is available at: http://www.state.il.us/court/Opinions/AppellateCourt/2013/5thDistrict/5110530.pdf.
A bank customer ("Account Holder") opened two payable-on-death ("POD") accounts (also known as Totten Trusts) consisting of certificates of deposit ("CDs"). Because the accounts were POD, Account Holder remained the owner and holder of the accounts with full control over the funds in the accounts during her lifetime. Account Holder's two granddaughters ("Granddaughters") were the original designated beneficiaries on the account and were to become the holders of the CDs upon Account Holder's death. However, Account Holder later contacted plaintiff bank ("Bank") requesting forms for changing the beneficiaries on the CDs.
Bank sent Account Holder the requisite forms, and Account Holder filled in the paperwork to indicate a change in the designated beneficiary for both CDs to Account Holder's daughter ("Daughter"), the mother of Granddaughters. Account Holder placed the completed forms in the mail. Two days after mailing the forms, Account Holder died.
The day following Account Holder's death, Bank received the completed change-of-beneficiary forms and changed the designated beneficiary on both CDs to Daughter. After being informed of Account Holder's death, Bank filed an interpleader complaint against Granddaughters and Daughter, seeking a determination of whether it had the authority to accept Account Holder's request for a change of beneficiaries on the CDs.
Granddaughters moved for summary judgment, asserting that the CDs should have remained in their original form with Granddaughters as the designated beneficiaries, because Bank lacked authority to make any changes as it had not "accepted" the written forms changing the beneficiary during Account Holder's lifetime. Daughter, on the other hand, individually and in her capacity as the executor of Account Holder's estate, also moved for summary judgment, asserting that Account Holder had effectively changed the beneficiaries for the CDs, because Account Holder did all that was required of her with respect to the "written instrument" prior to her death.
The lower court entered summary judgment in favor of Granddaughters, reasoning that the change needed to have been actually accepted by Bank before Account Holder's death in order to be effective under the Illinois Trust and Payable on Death Accounts Act, 205 ILCS 625/1-15 ("POD Act"). Daughter appealed. The Appellate Court reversed and remanded.
As you may recall, referring to the death or incompetence of a bank customer, the Uniform Commercial Code ("UCC") provides in part that: "(a) . . . . Neither death nor incompetence of a customer revokes the authority to accept, pay, collect, or account until the bank knows of the fact of death or of an adjudication of incompetence and has reasonable opportunity to act on it. (b) Even with knowledge, a bank may for 10 days after the date of death pay or certify checks drawn on or before that date unless ordered to stop payment by a person claiming an interest in the account." 810 ILCS 5/4-405(a), (b).
In addition, the POD Act provides in part that "[i]f one or more persons opening or holding an account sign an agreement with the institution providing that on the death of the last surviving person designated as holder the account shall be paid to or held by one or more designated beneficiaries, the account, and any balance therein which exists from time to time, shall be held as a payment on death account and unless otherwise agreed in writing between the person or persons opening or holding the account and the institution: (a) Any holder during his or her lifetime may change any of the designated beneficiaries to own the account at the death of the last surviving holder without the knowledge or consent of any other holder or the designated beneficiaries by a written instrument accepted by the institution[.]" 205 ILCS 625/4(a).
Moreover, the POD Act controls the distribution of funds of a POD account by providing that a financial institution is not required to distribute assets until presented with legal evidence of the death of the holder and proper requests by the beneficiaries. 205 ILCS 625/10.
Noting the ambiguity in the POD Act through its use of the phrase "during his or her lifetime" and the past-tense verb "accepted," the Court, in construing the terms and provisions of the POD Act as a whole, concluded that the POD Act's provision governing the change of beneficiaries "was intended to protect the intentions of the holder of the account, and not to set a bright-line time for the acceptance or [sic] written instrument by financial institutions."
Thus, after reviewing the history of POD accounts and noting that such accounts are testamentary in nature, the Court reasoned that paragraph (a) of the POD Act is structured in such a way as to give Bank the authority to accept Account Holder's request for change of beneficiaries, as the timing issue is directed to the actions of the holder of a POD account and not to acceptance by Bank.
Specifically, the Court noted that the phrase "during his or her lifetime" strongly suggests that the time limitation apply only to the holder's execution of the written instrument, and not to the time of acceptance by the financial institution. See In re Estate of Petralia, 32 Ill 2d 134, 204 N.E.2d 1, 2 (1965)(adopting definition of Totten trust in the Restatement which explained that the phrase "during his lifetime" means that the intent of the holder, and not that of any potential beneficiary, controls the rights in the account assets and that to revoke the account, the holder need only manifest intention with no particular formalities required to do so). See also Restatement (Second) of Trusts § 58 cmt. c (1959).
Accordingly, in light of the history of POD accounts, the Court sought to determine whether Account Holder had manifested her intentions to change the beneficiaries of the CD accounts "during her lifetime." See Cotton v. First State Bank of Mendota, 182 Ill. App. 3d 400, 402-03, 527 N.E.2d 1103, 1105 (1989)(concluding that bank had no obligation to consult with the beneficiary about changing the named beneficiary and noting that holders of POD accounts have absolute right to alter or remove POD provisions); In re Estate of Weiland, 338 Ill App. 3d 585, 602, 788 N.E.2d 811, 826-27 (2003)(ruling that holder's failure to sign a signature card did not invalidate the creation of a POD account and observing that it is the intent of the account holder, not the form of the written agreement, that governs whether the holder intended to establish a POD account); Gonzalez v. Second Fed. Sav. and Loan Ass'n, 2011 Ill App (1st 102297, ¶ 47, 9054 N.E.2d 245 ("Gonzalez")(noting that a written instrument, not necessarily a signature card, executed by the holder creates a presumption that the holder intended to create a POD account and ruling that the propriety of the document requesting a change is determined by whether the financial institution actually accepted the instrument).
In taking issue with the lower court's bright-line test whereby only written instruments that are actually accepted by the financial institution prior to a holder's death may effect a change in beneficiaries, the Appellate Court noted, as did the court in Gonzalez, that the POD Act allows a change of designated beneficiaries through any form "accepted" by the institution and that the form of acceptable document is left to the discretion of the financial institution.
Moreover, pointing out that the UCC complements the POD Act insofar as the UCC clarifies the authority of Bank to accept the forms presented by Account Holder before it knew of her death, the Court noted that the UCC allowed Bank to effectuate the intent of Account Holder while not upsetting the procedure for distribution of POD account assets under the POD Act. As the Court explained, "the [POD] Act and the [UCC] allow financial institutions to respond in good faith to the manifested intentions of their clients" and the UCC gave Bank the "right to accept, and account, for a reasonable time after the death of [Account Holder], and [Account Holder] instructed [Bank] through precise written instruments."
Accordingly, ruling that summary judgment in favor of Granddaughters was not warranted, the Appellate Court reversed and remanded with directions that if the lower court determines that Bank accepted the written instruments from Account Holder, the change of beneficiaries was effective under the POD Act and Bank will not be not subject to liability for having accepted the instruments.
Ralph T. Wutscher
McGinnis Wutscher LLP
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