Imagine the following scenario: For years, you have worked with a valued professional advisor who has become a close friend, maybe even closer than some of your family members. You know her family, attend church with her and know her to be a model citizen who contributes significant value to your community. This professional has suffered some truly unfortunate life circumstances with the loss of her spouse and children in a recent car accident, and the more you and your spouse discuss whom to leave your estate to, the more your professional advisor’s name comes up. Perhaps you have no children of your own and you are no longer close with anyone in your own family. You would rather see your property pass to someone whom you know and care for than to just another charity that may not properly use the funds you leave to them. Working with your estate planning attorney, you and your spouse decide to leave a significant share of your estate to this professional advisor, but as a surprise. Surely, this will be a much-appreciated gift for this advisor for whom you feel such affinity.
What Could Go Wrong?
As professional advisors, we often spend hours with our clients, becoming familiar with some of the most personal details of their lives. Being a good listener and helping our clients achieve their financial and tax planning goals can create a natural closeness and high personal regard between clients and advisors. For individuals in similar circumstances to the fictional scenario described above, naming a trusted advisor who is also a friend as a beneficiary of your will, trust, insurance policy, or retirement account can feel very natural and desirable. So why would a professional advisor ever refuse such a generous gesture from you?
For advisors from certain professional backgrounds, deciding whether they can accept such a gift is easy because their professional licensing organization has already decided it for them.
FINRA Registered Investment Advisors
For example, professionals who are registered with and regulated by the Financial Industry Regulatory Authority (FINRA) are subject to FINRA Rule 3241. This rule requires any person registered with FINRA to decline being named as a beneficiary of a client’s estate or receipt of a bequest (gift at death) except under very limited circumstances. Those limited circumstances include being a member of the client’s immediate family (as defined in the rules) or seeking and obtaining written approval from the member firm with which the registered advisor is associated to accept such a gift or bequest. The rule is fairly straightforward and leaves very little room for differing interpretations. In general, a registered investment advisor cannot accept such a gift from or otherwise be a beneficiary of a client’s estate as in the scenario described above.
State bar association rules of professional conduct govern the ethical and professional responsibilities of members of the legal profession and are frequently adapted from the American Bar Association’s Model Rules. Under these rules, attorneys are also generally prohibited from being named as a beneficiary in a client’s will or trust document that the attorney prepared. For example, the Model Rules specifically prohibit a lawyer from “preparing on behalf of a client an instrument giving the lawyer or a person related to the lawyer any gift unless the lawyer or other recipient of the gift is related to the client.”
Certified public accountants (CPAs) are also subject to rules that dissuade accounting professionals from accepting gifts or bequests from clients unless it can be clearly shown that such gifts do not impact the CPA’s ability to exercise independent judgment.
As the above-referenced professional rules of conduct demonstrate, in an estate planning context, the general principle is that a professional should seek to avoid profiting from the death of a client. Of course, there is nothing wrong with a professional continuing to offer the services that they provide in the normal course of business to the executor of the deceased client’s estate or the trustee of their trust. But where a professional obtains a windfall from a client through a gift, bequest, or beneficiary designation that is clearly not compensation for services rendered, a professional should very carefully consider the wisdom of accepting such a gift.
If one of your relatives or another professional advisor were to learn of such a gift, there could be an assumption of impropriety or that your professional advisor has violated their fiduciary obligation to you by seeking to exploit the relationship of trust for improper financial gain. Accusations of undue influence or questions surrounding your mental capacity to make such gifts may arise. And even if it can be proven that your professional advisor did not in fact engage in any pressure tactics or take advantage of their position of trust, there could nevertheless be significant controversy, professional complaints filed, or even litigation against your professional advisor to get to the bottom of the situation or force some form of a financial settlement with the advisor.
Beyond that, even innocently naming your advisor as a beneficiary of your accounts and property could jeopardize your advisor’s professional licensure in their chosen profession, as well as significantly damage the public’s perception of the ethical conduct of other members of that profession.
Professional advisors with clients who want to leave them gifts or bequests from their estates should almost always politely decline, explaining the practical and ethical reasons why accepting such gifts could be counterproductive to the client, the professional advisor, and the profession in general. The advisor should then have a thoughtful discussion with the client about naming an appropriate alternative to the advisor. The professional could also help the client identify alternative charitable organizations that they may find attractive in lieu of the gift to the advisor.
Whatever you ultimately decide, your professional advisor will likely be able to sleep much better at night knowing that a disgruntled family member will not someday file a FINRA or other ethical complaint against them long after you have passed away and the money is spent. Furthermore, helping your professional advisor maintain the integrity and ethical standards of their profession will undoubtedly pay dividends from a professional and reputational perspective that far outweigh the financial benefits of accepting even a generous gift from you.