This is a continuation from our last post on whether a change of beneficiary designation was actually a mistake. In this post, we summarize the facts and discuss the duty of loyalty required in a fiduciary conservator relationship.
The recent Colorado Court of Appeals case detailed the facts. A brief summary is that an elderly mother changed her beneficiary designation on pay-on-death retirement accounts that contained the bulk of her estate assets (approximately $3 million). She left the accounts to a daughter who suffered from mental illness and at the time was homeless in Denver. The change resulted in a much smaller inheritance for her son and his children.
A conflict of interest
Her son was upset that this beneficiary change effectively disinherited him from one-third of her estate, which would have flowed to a trust set up to benefit him and his children. He framed it as a mistake, which we discussed in our previous post.
The brother started a conservatorship action in Colorado. The court appointed him as his sister's conservator. In this role, he disclaimed the assets arguing they were at risk of being wasted or dissipated.
At this point, these assets became the property of the mother's estate and subject to her will (one-third directed to the brother's trust and two-thirds to a special needs trust for the sister). Supporting the petition, the brother argued that this would secure the funds. The court approved saying "[Sister's] assets will be placed in a Supplemental Needs Trust for [her] benefit."
Redistribution according to the will redirected one-third to brother's trust. And he moved the assets from a Roth IRA (about $300,000) to an account in the name of his children.
Two years later...
Sister moved back to New York, which required a parallel guardianship proceeding. At this time, sister asked about the $1 million brother diverted to his trust. Court appointed counsel filed a motion on her behalf to void the disclaimer.
After re-opening the case, the court approved a request for an independent accounting. An evidentiary hearing to consider if brother had breached his fiduciary duty as conservator also took place.
Disclosure of conflicted transactions is not enough
As conservator, the brother had the duty to manage his sister's assets for her sole benefit. This duty of loyalty does not allow a conservator to enter into financial transactions if they create a conflict between his fiduciary duties and his own personal interests.
Disclosure alone of conflicted transactions does not immunize a conservator from a later breach of fiduciary claim. These transactions must be fair and reasonable to the protected person.
Two million dollars instead of three
The brother acknowledged harm to his sister in that she had fewer available assets, but he still believed the disclaimer benefited her. The court was not convinced, citing his failure to look at options to protect her interests in the pay-on-death assets.
After the hearing, the probate court held that the brother's actions were "deceptive and undertaken in bad faith." The court ordered him to reimburse the value of diverted assets. On appeal, the probate court decision was upheld.
The fiduciary duty is serious. A civil theft statute trebles damages in these types of cases as well. Testing the system and pushing the envelope ultimately creates more risk.