Does Undue Influence Apply To Lifetime Transfers?

In prior blog posts we addressed the topic of contesting a Will on the basis that it was the product of undue influence.  But what about circumstances in which the Will is not the product of undue influence, but certain lifetime transfers may have been?  This all too common scenario typically arises in one of the following ways, each of which is discussed below: (1) Outright transfers to a beneficiary; (2) beneficiary designations for retirement assets and life insurance; (3) bank and brokerage account titling or beneficiary designations; and (4) abuse of powers granted under a Power of Attorney.

Outright Transfers - You are a beneficiary under the Will of a person who had $1,000,000 in assets a year before she died.  At the time of death, the estate consists of only $100,000.  The rest of the money was “gifted” by the decedent while she was alive to another beneficiary.  What can you do?  While all adults are generally presumed to be competent to make a gift, the law will shift the burden to the recipient of a lifetime gift to prove it was not the product of undue influence if it can be shown that the gift recipient maintained a “confidential relationship” with the donor.  As discussed in prior blog posts, a confidential relationship is one of trust and reliance, which typically, but not always, exists in a parent-child relationship.  So-called “improvident gifts,” which are gifts that leave the donor without adequate means of support, are particularly suspect.

Beneficiary Designations - As discussed in a prior blog post, many assets pass at death according to separate beneficiary designations rather than provisions of a Will.  The most common so-called “non-probate” assets that pass by beneficiary designation are life insurance benefits, retirement benefits (such as IRAs, 401(k)s, 403(b)s and pensions) and annuities.  Those designations can be challenged in the same manner as outright transfers, although procedurally things can sometimes be complicated by the existence of a third party payor, such as a life insurance company or trustee/custodian of an IRA or retirement plan.

Bank or Brokerage Accounts - Bank or brokerage accounts with a “Pay-on-Death” or “Transfer-on-Death” designation pass to the named beneficiary upon the death of account owner regardless of the provisions of the account owner’s Will.  Those designations can be challenged in a similar manner to outright transfers, discussed above. Similarly, funds in an account titled “joint-with-right-of-survivorship” pass to the surviving joint owner or owners by operation of law.  It is common for a parent to add a child to an account as a joint owner so that the child can have access to that account if the parent is disabled.  Given that the account passes to that child upon the parent’s death, the issue arises as to whether that is what the parent truly intended, or whether the account was established as a joint account “for convenience purposes only.”  So-called “Convenience Only” accounts can be effectively brought back into the estate to be distributed according to the decedent’s Will notwithstanding their status as joint accounts.

Power of Attorney - A Power of Attorney is a legal document by which you grant someone else, known as your “Agent”, the power to act on your behalf.  Powers of Attorney often grant the power to make gifts of property, typically to deal with situations in which the person granting the power of attorney, known as the “Principal,” is disabled and the gifts are necessary in order reduce estate tax exposure or to minimize exposure to long-term care expenses.  However, absent a specific direction in the Power of Attorney, an Agent has no authority to make gifts of the Principal’s property.  Unfortunately, it is not uncommon for Agents to exceed their authority under a Power of Attorney when it comes to making gifts, particularly to themselves and whether authorized by the Power of Attorney or not, and any such gifts may be challenged.  The first step is usually an application to the court to demand an accounting of the Agent’s actions, which can be granted if there is doubt or concern that the Agent is acting solely for the benefit of the Principal or is exceeding the authority granted to the Agent by the Principal.

If you have any questions about this post or any other matters, please contact me at jjcostellojr@nmmlaw.com.