Imagine the following scenario: As a professional advisor, you have worked with a married couple for decades. They have been ideal clients, have taken a genuine interest in you and your family, and have told you on multiple occasions how much they appreciate your professional advice and friendship for all of these years. The wife passed away recently, and the husband’s health is failing. With no children of their own and only distant and estranged relatives within their family, they spent a large portion of their wealth over the years supporting a number of charitable organizations, but they did not wish to provide any further gifts to the charities at death. As a result, you eventually learn from the husband that you have been named as a beneficiary of their trust to receive a sizable distribution at the husband’s death. When you express your surprise and gratitude for this kind gesture, your client confirms that he and his wife had discussed providing you with such a gift for years and that they are happy to do so as a reflection of the affinity they feel toward you.

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 your client achieve their financial and tax planning goals can create a natural closeness and high personal regard for one another. For clients in similar circumstances to the fictional scenario described above, naming a trusted advisor and friend as a beneficiary of their 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 a client?

For advisors from certain professional backgrounds, deciding how to act in the above scenario is easy because it is already made for you. In some cases, allowing yourself as a professional advisor to be named as a beneficiary in a client’s estate plan can lead to an ethics complaint and possible sanctions by your professional regulatory authority.

FINRA Registered Investment Advisers
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 adviser cannot accept such a gift from or otherwise be a beneficiary of a client’s estate as in the scenario described above.

Attorneys
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.^[1] 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.”^[2]

Accountants
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.^[3]

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 client’s death. Of course, there is nothing wrong with you providing the services you typically perform in the normal course of business, such as tax preparation or investment advice, to the executor or trustee appointed by your deceased client, as long as it is done within your profession’s rules of professional conduct. But where a professional obtains a windfall through a gift, bequest, or beneficiary designation that is clearly not compensation for services rendered, a professional should consider very carefully the wisdom of accepting such a gift.

If a client’s family member or another professional advisor were to learn of such a gift, there could be an assumption of impropriety or that you as the professional advisor have violated your fiduciary obligation to the client by seeking to exploit a relationship of trust for improper financial gain. Accusations of undue influence or questions surrounding your client’s mental capacity to make such gifts may arise. And even if it can be proven that you, as the professional, did not in fact engage in any pressure tactics or take advantage of your position of trust, there could nevertheless be significant controversy, professional complaints filed, and even litigation against you and your firm to get to the bottom of the situation or force some form of a financial settlement.

Beyond that, you may be jeopardizing your own professional licensure in your chosen profession, as well as significantly damaging the public’s perception of the ethical conduct of other members of your 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 professional should then have a thoughtful discussion with the client about naming an appropriate alternative to the professional. The professional could also gently suggest a variety of charitable organizations that the client may find attractive as beneficiaries of a charitable gift, or even a charitable cause that is near to the heart of the professional advisor in lieu of the gift to the advisor.

Whatever the client ultimately decides, you will likely be able to sleep better at night knowing that a disgruntled heir of the client will not file a FINRA or ethical complaint against you long after the client has passed away. Furthermore, maintaining the integrity and ethical standards of your profession will undoubtedly pay dividends from a professional and reputational perspective that will far outweigh the financial benefits of accepting such gifts in the long run.

 

Law Offices of J.R. Hastings • 1003 Third Street, San Rafael, California 94901 • 415-450-6692