When Beneficiary Designations and Powers of Attorney Don't Play Well Together

When a person dies, property passes to the heirs in one of three ways. The first way is through joint ownership with a right of survivorship. This most often happens when real property is owned by husband wife. The second way is by beneficiary designations. Beneficiary designations control life insurance, most annuities and most individual retirement plans. The third way is the will of the decedent. Anything that doesn't pass to heirs through joint ownership or beneficiary designation, passes according to the terms of the will (or probate-avoidance trust). In a coherent estate plan, all three ways work together to carry out the wishes of the deceased.

More and more, I see people putting beneficiary designations at the center of their estate plan. In these estate plans, all the major assets pass through survivorship or beneficiary designations. Some people like the simplicity of it. Others are encouraged by bankers or brokers to use beneficiary designations because it "avoids probate".

Most people, in addition to an estate plan, have a power of attorney. The power of attorney is a document that anticipates disability rather than death, and a power of attorney becomes scrap paper the moment the person who created it dies. Death and disability are closely related, however, and people tend to plan for them both at the same time.

Powers of attorney and beneficiary designations do not always play well together.

A beneficiary designation is designed to determine who gets your money when you die. A power of attorney is designed to allow an agent to help you with money management while you are alive. The power of attorney I write for my clients does not allow the agent to change beneficiary designations. My reasoning is twofold: (1) I have a hard time seeing how a change in who gets money when you die protects you while you are alive; and (2) changing beneficiary designations by use of a power of attorney invites litigation.

Not everybody agrees with me about using a power of attorney to change beneficiary designations. I got a call one day from a brokerage who had used my opinion on the issue, as expressed somewhere in this blog, as reason not to allow a change in beneficiary designation by the agent named in a power of attorney. My opinion, however, is more of a good idea than a statement of law and that case proceeded to litigation.

When an estate plan is relying heavily on beneficiary designation, an agent under a power of attorney can significantly change the plan without changing the beneficiary designation.

It works like this. Uncle Scrooge has his money with the Imprudential Fund and a personal investment advisor is managing the money by investing it in the investments that bring the advisor the largest commissions. The beneficiary designation on file at the Imprudential Fund names Scrooge's favorite nephew, Huey, to receive the money when he dies. Louie is named as Scrooge's agent in a power of attorney, and Uncle Scrooge's will leaves everything to Huey, Louie, and Dewey in equal shares.

Louie doesn't like seeing Uncle pay all those broker commissions, so when Uncle becomes incapacitated, Louie moves the money in the Imprudential Fund to the Walletguard Fund, a broadly based index fund. No beneficiary designation is made for the Walletguard fund. This means that at Uncle's death the money will pass by will to all three nephews.

When Scrooge dies, Huey, Uncle’s favorite, sues Louie for changing the investment subject to beneficiary designation to one that was not subject to the same designation. Louie defends with the fact that he was only doing what was best for Uncle Scrooge while he was alive, and the benefit to  Louie and Dewey was incidental to protecting Scrooge.  

This problem can arise in a variety of fact patterns. What if, instead of moving Scrooge's accounts, Louie has simply paid for all of Scrooge's long term care needs from that account (rather than from other accounts) so that when Scrooge died, there was nothing left. Could Louie still be sued because he did not pay the long term care costs from Scrooge's assets in approximate proportion to the heirs expectancy interest in the eventual estate? It can get complicated.

We often say in the law biz, that the agent steps into the shoes of the principal, and can do whatever principal could do. Uncle Scrooge certainly could have moved his accounts or paid all of his long term care from a single account without regard to how it affected any of his nephews. So why can't his agent do the same? Well, because the agent risks being sued and losing. It seems that the agent cannot safely change the principal's estate plan nor be indifferent to it.

The question for the litigation-averse agent in a power of attorney is whether he must refrain from moving an account subject to a beneficiary designation, even it is in the principal's best interest while he is alive. And if he does, can he put a similar beneficiary designation on the new account without getting in trouble with the people who take under the will. Can he combine two accounts if they have different beneficiaries. Must he consider the expectancy interest of the beneficiaries when paying care costs or paying for a trip for old Scrooge to Disneyland. These are all unresolved questions and resolving them -- through litigation -- is going to be expensive for somebody.

I have changed my own power of attorney to authorize my agent to engage in transactions without regard to the effect it may have on those who are in line to receive my money when I am dead. This clause, combined with a prohibition on changing any beneficiary designations I have, seems to honor my estate plan while encouraging my agent to think more about my well being than that of the people who will benefit from my death.

Why Oregon conservators should be using fee-only financial advisers.

I have gotten some pushback from professional fiduciaries about my advocacy of index funds when investing money belonging to the disabled. The complaint is that the professional fiduciaries have too much to do already. They can't be expected to understand the intricacies of investment, diversification, risk, and the prudent investor rule. Thus, they should be allowed to contract out that aspect of the job to experts.

It is a good point, but not a great point. I don't think the job is that difficult these days if one was a rudimentary understanding of money and math, but I am a nerd and it may be unfair to expect others to share my interests.

However, professional fiduciaries who hire financial advisers to help manage the money of the disabled are required each year to disclose the amount paid to these advisers. No professional fiduciary wants to have that disclosure be an embarrassment.

Disclosing how much is paid to most commission-based financial adviser is not easy. The fee is not listed anywhere in those thick quarterly statements that many brokerages send their clients. In dealing with one national brokerage I have had to write a separate form for the agent to fill in  the amount of his firm's fees. I was always shocked by how high it was.

I think the solution to both the disclosure problem and the excessive fee problem lies in Oregon conservators hiring "fee only" financial advisers who charge either by the hour or the project. (Avoid paying a percentage of the assets managed unless this works out to rate under $200 per hour). These guys and gals get paid directly by the person who is hiring them. The money comes from the client, not from the manager of the product they recommend. They are not influenced by the commission associated with the product because there is no commission. Because the fiduciary will be writing the check for the fee, it will be easy to make that disclosure at the end of the year. And in most cases, the fee itself is going to be lower than the fee paid to commissioned agents.

Fee only financial advisers often advertise at the Fee Only Network website. Portland fee only advisers can be found here.

By selecting a fee only adviser, Oregon conservators can assure that their clients investments are not being skewered by the commission associated with the investment and that they will have a comprehensible statement of fees to present to the court.

Now, I happen to think that a fee only adviser will often suggest the safety and predictability of index funds for disabled clients. If, however, I am wrong and the independent adviser suggests a fund with a three percent cost ratio, at the very least the conservator has the safety of being able to tell the court that the investment advice was not influenced the commission the adviser got from the sale.