Today is another lesson in why a lawyer planning an estate should try to steer clear of being a beneficiary. In Porter v. Denas, No. 04-05-00455-CV, 2006 Tex. App. Lexis 5259 (Tex. App.–San Antonio June 21, 2006), the court held that a lawyer’s failure to advise a client to change an IRA beneficiary designation to implement the client’s intended dispositive scheme for her estate was actionable as breach of fiduciary duty, and not merely as legal malpractice, where the lawyer was the named beneficiary.

James Alexander Denas, as the personal representative for the estate of Alice B. Wuelzer, brought suit against Stephanie and Steven Porter regarding ownership of an individual retirement account (IRA) established by Alice.

Alice owned the IRA in question and it contained a payable-on-death designation. In 1996, Steven and Stephanie Porter, the nephew and grandniece of Alice, respectively, were named as the beneficiaries on the account. Prior to 1996 and until Alice’s death, she received legal and accounting assistance from Steven and Stephanie, both of whom are attorneys. Steven, who is also a certified public accountant, provided assistance to Alice regarding her financial affairs and drafted several wills for Alice that were replaced by subsequent drafts prepared by Stephanie. Ultimately, a will drafted by Stephanie was probated.

The first will drafted for Alice established a trust for James Denas, Alice’s only child, with Stephanie as trustee. The trust was not to be terminated until James reached the age of sixty-five. While Alice’s intent was to leave the majority of her assets to James, the trust was established to prevent James’ wife, Mita, from accessing the money Alice planned to leave to James. James later divorced Mita, and Alice’s will was then changed to eliminate the trust and name James as the outright beneficiary and the executor. Despite Alice’s intent to leave James the majority of her assets, the IRA beneficiary designation was never changed from the Porters to James. James, as independent executor, filed suit against the Porters alleging numerous causes of action.

The Porters testified that they had no knowledge they were listed as the IRA beneficiaries. Furthermore, they spoke of Alice’s secretive nature regarding her estate and finances. Mainly, they claimed Alice would ask the Porters to perform specific tasks regarding drafting her will or helping with finances but she provided them with very little information. Several witnesses stated that Alice was a very independent woman and the trial judge even described Alice as “forceful.” The Porters testified that they followed all of Alice’s instructions. Further, the evidence shows that Alice made several trips to the bank that held her IRA, but she never changed the beneficiary designation. Changing beneficiaries is a very simple and quick procedure, which Alice could easily have done during one of her visits to the bank.

The trial court found that the Porters breached their fiduciary duty owed to Alice and they failed to overcome a presumption that a gift to a fiduciary by the principal is unfair to the principal. Thus, judgment was entered that the IRA belonged to Alice’s estate.

On appeal, the Porters argued they had no duty to inform Alice to change the primary beneficiary on her IRA from Stephanie to James, or to inquire about Alice’s mental competence or intent with regard to her IRA. The court of appeals disagreed, holding:

As Alice’s attorneys and with Steven performing functions as Alice’s certified public accountant, the Porters were fiduciaries to Alice as a matter of law. Indeed, the record shows that the Porters drafted Alice’s various wills and consulted with her to formulate and effectuate her plan to keep money from her son while he was married to Mita. . . .

In the judgment, the trial court stated that the Porters breached a fiduciary duty owed to Alice. The record shows that the Porters were named as the IRA beneficiaries on April 5, 1996. However, on this same day, a note was created which stated, “Change Beneficiaries to Stephanie and Steven Porter [on] all CD[s,] IRA . . . .” The evidence suggested that this note was in Stephanie’s handwriting, thus attesting to the Porters’ knowledge that they were listed as the IRA beneficiaries. It was undisputed that Alice’s intent was to leave nearly everything to James. After James divorced his first wife, Alice had her will changed to omit the trust and provide James with the estate outright. Despite Alice’s changes to the will to reflect her intent, the Porters still remained as the IRA beneficiaries. An inventory and list of claims was created regarding Alice’s assets which revealed that Alice’s estate consisted of nearly $114,000, excluding the $54,000 IRA. However, added together, the IRA amounted to more than 32% of Alice’s assets. Witnesses stated that after Alice’s death, Stephanie said that the money in the IRA was not hers and even inquired about changing the IRA beneficiary from herself to James.

As the fact finder, the trial court could have believed that the Porters’ fiduciary duties included, within the scope of their relationship, advice regarding Alice’s IRA. . . . Additionally, the trial court could have determined that the Porters failed to deal fairly or in good conscience with Alice.

The Porters also contended that James’ claims were properly categorized as legal malpractice rather than a breach of fiduciary duty. The court of appeals disagreed:

Texas does not permit a plaintiff to fracture legal malpractice claims. Greathouse v. McConnell, 982 S.W.2d 165, 172 (Tex. App.–Houston [1st Dist.] 1998, pet. denied). Legal malpractice claims are based on negligence due to an attorney’s failure to exercise ordinary care. Aiken v. Hancock, 115 S.W.3d 26, 28 (Tex. App.-San Antonio 2003, pet. denied). However, a claim for a “[b]reach of fiduciary duty often involves the attorney’s failure to disclose conflicts of interest, failure to deliver funds belonging to the client, improper use of client confidences, or engaging in self-dealing.” Id. (citing Goffney v. Rabson, 56 S.W.3d 186, 193 (Tex. App.–Houston [14th Dist.] 2001, pet. denied)). Here the claim properly reflects one for a breach of fiduciary duty.

The Porters also contended that the trial court erred when it ruled that they did not rebut the presumption that a gift from a principal to a fiduciary is unfair. The Porters asserted that this was error because the transfer of the IRA on death was not a gift as a matter of law. The court of appeals agreed with the Porters not only because the transfer of the IRA was not a gift, but also because it did not constitute an inter vivos transaction. The court said:

Texas courts have applied a presumption of unfairness to transactions between a fiduciary and a party to whom the fiduciary owes its duties. Tex. Bank & Trust Co. v. Moore, 595 S.W.2d 502, 507-08 (Tex. 1980); Collins v. Smith, 53 S.W.3d 832, 840 (Tex. App.–Houston [1st Dist.] 2001, no pet.). This presumption shifts the burden of showing the fairness of the transaction on the profiting fiduciary. Moore, 595 S.W.2d at 507-08. “The fiduciary must show proof of good faith and that the transaction was fair, honest, and equitable.” Collins, 53 S.W.3d at 840 (citing Miller v. Miller, 700 S.W.2d 941, 947 (Tex. App.–Dallas 1985, writ ref’d n.r.e.)).

The Porters focus their argument on the fact that the transfer of the IRA on death was not a gift as a matter of law. They contend that the elements of a gift, such as the intent to make a gift and the delivery of the gift, are absent from the facts here. Therefore, because a gift was not made, the Porters argue that the presumption should not apply. We agree with the Porters and hold that the trial court erred by requiring the Porters to rebut this presumption.

The IRA was payable on the death of Alice, thus there could be no present delivery to the Porters. See Punts v. Wilson, 137 S.W.3d 889, 893 (Tex. App.–Texarkana 2004, no pet.) (holding that the transfer on death of a typical P.O.D. account is not a gift because no delivery is involved and the owner never divests title, dominion, or control). If the alleged donor has the power to revoke, then a gift was not made. Chaison v. Chaison, 154 S.W.2d 961, 964 (Tex. Civ. App.–Beaumont 1941, writ ref’d w.o.m.). Here, as the owner, Alice had the ability to change the beneficiary at any time, thus the IRA was not a gift.

Although we can find no case which states the presumption applies only when a gift is given by the principal to the fiduciary; every case that applies the presumption does so with inter vivos transactions only. An inter vivos transfer is “[a] transfer of property made during the transferor’s lifetime.” Black’s Law Dictionary 1536 (8th ed. 2004). The transfer was payable on Alice’s death, thus no transfer took place during her lifetime. The trial court erred when it required the Porters to rebut the presumption.

However, the court found this error harmless in view of the other trial court holdings:

Errors which require a reversal must be harmful. City of Brownsville v. Alvarado, 897 S.W.2d 750, 753-54 (Tex. 1995). When the presumption is applied, the burden to offer evidence that the transaction was fair is shifted to the fiduciary receiving the benefit. Stephens County Museum, Inc. v. Swenson, 517 S.W.2d 257, 261 (Tex. 1974). “[T]his evidence presented [becomes] a question for the [fact finder] as to whether there was a breach” of a fiduciary duty that would render the transaction invalid. Id. The trial court held that the Porters breached their fiduciary duties to Alice and that they failed to rebut the presumption at issue. This was merely stating that the Porters breached their fiduciary duties twice. Because this court has already concluded that the trial court did not err when it held that the Porters breached their fiduciary duties, this error was harmless.

The tension in this case is between the testator’s two intents: the intent to keep the IRA away from her son and the intent to give it to the lawyers (she had to give it to someone if she wasn’t going to give it to her son). Since she failed to change the designation before she died – the lawyers’ fault and not her fault, according to the court – it may have been just as well for the lawyers in this case that they were named as the beneficiaries of the IRA because it was there to give back. If some person other than the lawyers had been the designated beneficiary, then the representative of the estate, with a much weaker case, if any, for retrieving the IRA from the third-party beneficiary, would likely have been trying to beat the legal malpractice drum on the same facts.