Estate Planning in Practice: When do Beneficiary Designations Cause Problems?

by Jonathan A. Nelson

Beneficiary designations and trusts are two common tools for probate avoidance.

Beneficiary designations are often used for their simplicity and cost-effectiveness.  Life insurance policies, retirement plans, and payable-on-death bank accounts allow you to bypass probate and name a beneficiary directly.  A death certificate and a few forms are usually all that are needed to transfer the asset after death.  This streamlined process can provide relatively rapid financial resources, enabling the beneficiary to cover financial obligations with fewer delays and without court involvement.  Setting up beneficiary designations is usually free or low-cost, especially compared to establishing and maintaining a trust.  In addition, beneficiary designations may simplify any tax results, particularly for retirement accounts.

However, beneficiary designations also come with limitations.  They offer little control over how or when assets are used after distribution, and can have adverse results if a minor or a beneficiary who is financially inexperienced or incapable is named.

Additionally, beneficiary designations require careful reading and maintenance. Life changes such as marriage, divorce, or the birth of children can make existing designations outdated, and failing to update the designations can result in gifts going in unexpected directions.  For instance, the federal Thrift Savings Plan recently changed its rules such that a widowed or unmarried retiree who designates her children as primary beneficiaries but survives one of them without updating her beneficiary designations will not benefit her grandchildren – even if they are named as backup beneficiaries.  Each financial institution will have its own default rules on what happens if the designation cannot be followed exactly.

One of the most startling results can occur if the probate estate does not have enough assets to cover the decedent’s debts, expenses, and taxes.  For bank accounts in Virginia, these beneficiary accounts may be clawed back into the estate with little or no warning, and the executor has significant discretion in selecting such accounts and pursuing the repayments.  Not only can this result run contrary to the expectations of the beneficiary, it makes a beneficiary who saves their gift more easily collected from and a beneficiary who spends their gift potentially liable for the money already spent.  The potential for beneficiaries to feel they are not being treated equally is significant, and litigation is probable over what each’s “fair share” is.

In contrast, trusts provide greater flexibility and control. While they are more complex and costlier to set up, trusts allow you to specify conditions for distributions, provide for contingencies, protect assets from creditors, and (this last point is probably more significant than most people think) leave a living, thinking person in charge of implementing the plan.  This person has rights to seek changes if not all went as you anticipated, rather than a set of black and white instructions with no option for contingencies.

Beneficiary designations are still useful for many straightforward situations so long as they are understood and maintained, and a thoughtful combination of both beneficiary designations and trust provisions will often offer the most balanced and effective estate plan.  Speaking to an estate planning attorney about these tools should include a discussion of your financial goals, family situation, and the desirability of control and contingency provisions.

Virginia attorney Jonathan A. Nelson practices in estate planning, probate, trust administration, business formation, and estate and trust litigation, and brings nearly 20 years of experience resolving conflicts, negotiating settlements, vigorously advocating in the courtroom, and navigating compliance matters. He uses a personal touch and extensive legal knowledge to ensure that the particular needs and interests of each client are reflected in the legal services they receive.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Estate Planning in Practice: Guardianships vs. Powers of Attorney

by Jonathan A. Nelson

When an adult is unable to take care of his or her own interests, whether because of aging, catastrophic injury, developmental impairments, or otherwise, a guardianship may be required to allow another person (the guardian) to exercise the rights of the incapacitated adult (the ward) on the ward’s behalf.  Virginia differentiates between a guardianship of the ward’s person and a conservatorship of the ward’s assets, but for ease of discussion I will just use the term ‘guardian’ here.

A guardianship is a significant and serious step, involving a loss of rights for the incapacitated adult and is sometimes a blunt instrument, requiring the loss of many rights in order to address a narrower problem.  There are procedural safeguards built into the legal process, and although they may seem unnecessary in circumstances where everyone has the ward’s best interests at heart, they are also there for other important reasons, particularly allowing the incapacitated adult to participate in the process as much as they can, and catching the rare abuses of the system.  There are also significant gray areas, such as when the ward’s condition has varying severity, symptoms, or speed of progression.

Two important tools for avoiding unnecessary guardianships are powers of attorney for financial matters and medical directives for medical decisions, each allowing an agent to act on behalf of the principal in that subject matter.  These documents are important enough that the Virginia Code requires, before a guardianship can be granted, inquiry as to whether the documents exist and are sufficient.  The principal must have executed these documents before capacity was lost.

For many individuals and circumstances, these documents are sufficient – the agent can use them to manage investments, pay bills, contract for skilled care, and (with certain safeguards) consent to major surgery or authorize a Do Not Resuscitate order.  Because these documents do not take away any rights of the principal but instead allow both principal and agent to work together, they can be especially helpful where some decisions are beyond the abilities of adult (such as filing a tax return) but others are not (such as writing checks).  These documents also allow greater autonomy by allowing the principal to select his own preferred agents rather than a judge making the final decision, as in a guardianship.

There are times, however, when a power of attorney or medical directive may not be enough to prevent an incapacitated adult’s condition from causing him or her to take actions adverse to himself or herself.  If mom has the technical ability to still write checks and mail letters, but has lost the filter to avoid sending money to the nice man from Bulgaria she met online, a guardianship may be the only way to keep her from losing the assets she needs to live on.  Some conditions require a guardian to be able to admit the incapacitated adult for medical or mental care over the protest of the ward.

Dealing with incapacity at any stage is never easy, but a guardianship is not usually the first choice. If you are wondering about options for you or a loved one, a good first step is to consult with an attorney who practices in estate planning and guardianships in your state.

Virginia attorney Jonathan A. Nelson practices in estate planning, probate, trust administration, business formation, and estate and trust litigation, and brings nearly 20 years of experience resolving conflicts, negotiating settlements, vigorously advocating in the courtroom, and navigating compliance matters. He uses a personal touch and extensive legal knowledge to ensure that the particular needs and interests of each client are reflected in the legal services they receive.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Fiduciary Boot Camp – Multiple-Party Accounts

by Jonathan A. Nelson

When it comes to fiduciary administration, few things appear so deceptively simple as multiple-party accounts. 

What is a multiple-party account?  This is the term the Virginia Code uses to encompass joint accounts and pay-on-death (“POD”) accounts at banks and similar institutions; it does not apply to most brokerage or investment accounts.  From the banking side, these accounts are straightforward and low risk to the bank: when a person dies, the survivor(s) of a joint account and the beneficiaries of a POD account can be given full access to the funds without creating any liability for the bank.  Because of this liability shielding, my experience is that banks far prefer having an account set up this way, compared to the bank’s risks and delays if the account ends up as a probate asset of a deceased account holder.

Unfortunately for everyone who isn’t the bank, this is not the end of the story.  The complexity starts with Virginia Code § 6.2-619, which states that everyone on the multiple-party account bears a fiduciary obligation as under the Power of Attorney Act to everyone else on the account as to the others’ interests in the account.

During the lifetime of the other account holders, this can mean obligations to explain transactions.  While understandable and probably fine between mom and an adult child she lives with, if mom starts to lose capacity, the obligation to provide information can expand to distrustful siblings; if instead of being set up as a multiple-party account, the account was titled with the caretaking child having access through a separate power of attorney, that power of attorney could exclude the troublemaker siblings from a right to demand mom’s financial information (but does not release the agent from fiduciary duties).

On the death of a multiple-party account holder, not only does that fiduciary duty continue as to the funds, but Virginia Code § 6.2-611 further provides that the decedent’s interest in the account is still available for satisfaction of the decedent’s debts.  There is something of a presumption that a joint account is held 50/50 between two account holders, but that  a court hearing can be held to define each party’s ownership of the account by taking evidence of contributions and expenses.  For a POD account, the titling itself provides the presumption that the decedent contributed all of the funds in the account.

The process of clawing back the account’s funds involves the executor or administrator of the decedent’s estate suing the survivors/beneficiaries on the account (and the bank, if the funds are still held by the financial institution) and then proving the amount needed to satisfy the estate’s debts.  Since those debts include the attorney fees to claw back the account, a contested suit can quickly destroy any benefit to the survivors or leave them having to pay back money they have already spent.

What are the takeaways from this information?  Listen to your attorney or financial planner regarding how to title your accounts, even if your banker says he has an “easier” way.  While the account setup may be more complex, you will usually end up with better planning and more flexibility in handling future uncertainties.  I can also say from experience that it is a lot easier to tell beneficiaries they are getting less than they thought because the executor had to pay debts and expenses than to tell them they have to chip back in money they already hold; this is especially true if it takes a lawsuit to resolve this obligation.

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Lessons from Litigation: Accepting Powers of Attorney

by Jonathan A. Nelson

A power of attorney is an important and powerful tool – if an adult person (the Principal) can’t take care of everything for himself, or be in two places at the same time, he may wish to designate to another person (the Attorney-in-Fact) the authority to act on his behalf.  In order to facilitate and encourage the acceptance of powers of attorney, Virginia law includes a number of statutory protections allowing third parties to rely on powers of attorney without having to verify that the power is not void or terminated or the agent is properly using his authority, and even requires the third party to pay attorney fees if they unjustifiably refuse to honor a power of attorney.

But who bears the risk of a power of attorney being fake?  The Virginia Court of Appeals dealt recently with a forged power of attorney, in Robert K. Harwood, L.C. v. Chinchilla.  As reported, Juan and Rossemary executed limited powers of attorney allowing their brother-in-law Carlos to manage particular investment properties in Virginia.  Carlos took a genuine signature page, attached it to a new power of attorney granting him authority to mortgage the property, and took out a series of loans on the property and ran through the money.  A lender initiated foreclosure and the homeowners filed suit to invalidate the loan and deed of trust.

The decision itself turned on a single word in the statute – the Uniform Power of Attorney Act protects third parties if they rely in good faith on a power purportedly verified by a notary, while Virginia’s version of the statute dropped the word ‘purportedly’ and expressly excluded the third party protections where the signature was ‘forged’.  Finding that attaching the signature page to another document constituted forgery by Carlos, the Court ruled the signature on this document had not in fact been verified by a notary; accordingly, the lender bore the loss for having accepted the forged document rather than the homeowners for having had their signatures forged.  Because this result is specific to Virginia’s statutory language, it is important to note that other states may come to the opposite result.

The practical result of this decision will no doubt be increased scrutiny of powers of attorney by Virginia financial institutions, title companies, and others asked to accept these documents.

As the push grows for AI and digital signatures, seeing the wet ink originals may prove more important than ever; as is consulting with attorneys well-versed in your state’s case law and who oversee the preparation and the signing of these documents, to ensure they can be verified.

Please reach out if we can be of assistance.

Virginia attorney Jonathan A. Nelson practices in estate planning, probate, trust administration, business formation, and estate and trust litigation, and brings nearly 20 years of experience resolving conflicts, negotiating settlements, vigorously advocating in the courtroom, and navigating compliance matters. He uses a personal touch and extensive legal knowledge to ensure that the particular needs and interests of each client are reflected in the legal services they receive.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Lessons from Litigation: Can You Make Joint Wills?

by Jonathan A. Nelson

Occasionally, I get a question about whether a husband and wife creating a joint estate plan should have one will or two.

A joint will has been legally possible in Virginia since the 19th Century. Although I am not aware of any joint wills other than between spouses appearing in our case law, the case law also does not require marriage or any other similar relationship between the parties.  As a practical matter, the original of the will is admitted to probate on the death of the first as to the property of the first, and then it is re-admitted by reference on the death of the second as to the property of the second.

For a number of practical reasons, however, joint wills are generally inadvisable.  The execution of the document is easier to make a mistake on, whether in having the correct number of witnesses (neither testator counts as a witness) or in the self-proving affidavit correctly setting out what was done.  If the surviving testator changes the county or state of his residence, it will make obtaining and probating the document difficult and may require litigation to establish the will, since the original is already held by another court.  Furthermore, it requires the surviving testator’s executor to know both that the will has already been probated and that it is still the last will of the testator; an error as to either can require costly litigation to correct.

The joint will also requires great care in following its terms, particularly as to property conveyed from the first testator to the second, as that property would no longer be subject to a gift made only by the first testator even if there was a contingent beneficiary for that property; again, ambiguities or questions of interpretation are fertile grounds for otherwise avoidable litigation.

The case of Williams v. Williams, 123 Va. 643 (1918), involved more than a century ago what is perhaps the strongest reason to avoid a joint will:

The joint will itself is still revocable by the surviving testator as to his own property.  Accordingly, it does not provide any protection to the first-to-die that the survivor will retain those terms.  However, the fact that it is a joint will is always going to raise the question of whether the joint will was also a mutual contract to establish a will, which can be enforceable. 

Rather than creating this question (which may only be resolvable by litigation), it is almost certainly preferable to set out the contract to establish a will as its own unambiguous document (or incorporated in the document that includes the consideration for the contract, such as in a premarital agreement), and execute separate wills which can more readily be judged to satisfy the contract or not.

A joint estate plan that provides both certainty and flexibility, while avoiding preventable legal conflicts, requires an experienced estate planning attorney who can carefully balance the individual circumstances of the family, understand the goals, and put in place the instruments that accomplish them.

Virginia attorney Jonathan A. Nelson practices in estate planning, probate, trust administration, business formation, and estate and trust litigation, and brings nearly 20 years of experience resolving conflicts, negotiating settlements, vigorously advocating in the courtroom, and navigating compliance matters. He uses a personal touch and extensive legal knowledge to ensure that the particular needs and interests of each client are reflected in the legal services they receive.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.