Griff’s Notes, January 5, 2022: POD and TOD Designations
Tax, trusts and estates updates from around the country
Today’s installment of Griff’s Notes focuses on one issue – the increasing use of POD and TOD designations (often billed under the blanket term “beneficiary designations”) – and the effect on procedures for probate and trust administration.
Protections in General
If you have observed a trend of financial institutions encouraging account holders of taxable accounts, or deposit accounts, to add “beneficiaries,” you are not alone. Take, for example, this e-mail I received from Fidelity a few months ago:
Beneficiary designations are a matter of contract between the account holder and the financial institution, and thus are generally subject to contract law and contract capacity. That is not the focus of today’s discussion, although I am concerned about the disparity between will formalities and beneficiary designations, and how e-mails such as the one above from Fidelity encourage estate planning which supersedes underlying documents without legal or tax advice.
Instead, I think it is helpful to follow the money, or liability, to see how to protect clients. And, at the core of the issue, many practitioners are surprised to find out that financial institutions are generally protected from liability when paying out funds or assets according to a beneficiary designation. This allows the financial institution to shift the burden of estate disputes from themselves, to the recipients. In other words, if funds paid to a beneficiary are subject to a dispute, the party claiming such funds must go after the beneficiary and not the financial institution.
This protection is codified in Section 6-226 of the Uniform Probate Code, which generally relieves a financial institution from liability for amounts paid in accordance with a beneficiary designation so long as proof of death is presented by the recipient. The financial institution need not look into whether the beneficiary-recipient is deceased, incapacitated, or disabled at the time of payment (which can cause its own issues, and is the subject of the case below). However, a financial institution’s protection from liability can be cut off if the financial institution receives written notice of objection from a party, or from a spouse, personal representative, or heir or devisee of the deceased account holder, and so long as the financial institution has sufficient time to act on this written objection.
So, if you take nothing else from this article, my suggestion would be to consider written notice to the financial institution not to pay out funds without the permission of the personal representative or other affected party. Otherwise, you run the risk of having to claw back those funds from the recipient if a dispute or claim arises.
There are some examples where this claim potential should be apparent, typically in the areas of tax or creditor claims. Until Uncle Sam is paid, it does not make sense to pay out funds which may be subject to estate tax apportionment or income tax to the estate. Similarly, many assets subject to a beneficiary designation (other than life insurance or non-inherited retirement plan assets) may be subject to claims of estate creditors, even if the estate is not a beneficiary.
There are other, less apparent issues however. What if, for example, the decedent’s signature to the beneficiary designation could be invalid (due to incapacity or undue influence)? Or, what if the asset subject to the beneficiary designation could be community property? This latter point was the central dispute in today’s case.
Thanh-Huong Thi Abry v. The Vanguard Group, Inc. (S.D. Tex., December 31, 2021)
Central Issues: Duty of financial institution to investigate possible claims before paying assets to designated beneficiaries
Value Added Score: 8
Rule: A financial institution has no fiduciary duty to parties harmed by a beneficiary designation, including spouses under community property laws, and the liability protection afforded to the financial institution is strictly enforced so long as the financial institution has not received written objection prior to payment
In this case, Ms. Abry (the Plaintiff) was a widow who had lived with her deceased husband in Texas since 1987. Mr. Abry died in 2018. He had three annuity accounts, and a brokerage account, for whom the custodian was Vanguard. These accounts totaled north of $3 million.
Mr. Abry had initially named his wife as beneficiary on the annuities, without naming a beneficiary on the brokerage account. However, just two weeks prior to death, he changed the beneficiaries to name relatives in France as the annuity beneficiaries, and beneficiaries of one-half of the brokerage account (his wife was the beneficiary of the other half of the brokerage account). Vanguard paid out the annuity and brokerage accounts according to the beneficiary designations following Mr. Abry’s death.
Ms. Abry sued Vanguard, as she believed that the accounts were community property and thus were wrongly paid out. Vanguard moved to dismiss for failure to state a claim upon which relief could be granted. Ms. Abry responded, then filed an amended complaint, and in response Vanguard once again moved to dismiss. The District Court granted Vanguard’s motion.
Initially, the court considered Vanguard’s statutory immunity under Texas’s version of the UPC provisions cited above (Tex. Estates Code Sections 113.204 and 113.209). The Court clarified that this protection was not party-specific, but claim-specific, and that it applied to all claims in the absence of a written objection (which was not provided by Ms. Abry). You see, Ms. Abry had tried to argue that the immunity did not apply to spouses, but instead just to parties expressly listed in the statute – “a party, a POD payee, a beneficiary, or a successor to one of them.” (p.4 of the opinion). However, the Court opined that this technical argument did not align with the entire reading of the statute to grant immunity to all claims regardless of whether the payment was consistent with beneficial ownership between the parties.
Ms. Abry also asserted that Vanguard should have known, or inferred, that the annuities and accounts could be community property, given the residence of the Abrys in Texas since 1987. However, the Court declined to impose such a duty on financial institutions, as it would be too burdensome.
Ultimately, the Court found that Vanguard owed no duty to Ms. Abry, and thus was not liable for payment of the funds in compliance with a beneficiary designation even if such payment was in contravention of community property laws. The Court concluded that Vanguard was the wrong party here – they were merely an agent for Mr. Abry’s instructions, and Ms. Abry’s cause of action should have been against the beneficiary-recipients instead of Vanguard. Thus, her claim against Vanguard was dismissed with prejudice.
Conclusion
The key takeaway here is to protect yourself, and consider the procedure of filing a written objection. Beneficiary designations, especially POD and TOD designations, have grown and will continue to grow in popularity. Once the funds are paid out, it is not too late, but it becomes much more complicated to collect from beneficiaries.
I know a number of personal representatives to whom banks and financial institutions have refused to speak, as they do not consider the estate as being a party to a POD or TOD account when an individual is named as beneficiary. But, the personal representative’s duties extend to these accounts. What is the personal representative to do? The PR should send a written objection to payment to the financial institution as soon as it becomes apparent that the funds could be subject to a claim or dispute.
Also, as part of the planning process, it may be advisable to check with the financial institution to see if an account can be flagged as community property. This can protect the non-titled spouse’s interest. Even though community property cannot be transferred during life without the consent of both spouses, such protections (as seen in the case above) may not apply at death. So, if you represent a non-titled spouse, filing a written objection to payment to another beneficiary with the financial institution may be a good idea if the account in question might be community property.