While the new Department of Labor fiduciary rules — now stuck in a holding pattern after implementation was delayed by President Donald Trump — were primarily developed in an attempt to further regulate the advice provided by professionals in the financial services industry, with respect to individual retirement accounts, the newly expanded definition of “investment advice” will inevitably cover advice commonly provided by estate planners. As a result, estate-planning attorneys, who already owe their clients a high standard of care and a duty of loyalty under most state laws, could be subject to more stringent fiduciary requirements under federal law, whatever form the rule eventually takes, creating new liability concerns.
Traditionally, estate-planning attorneys weren’t likely to be considered fiduciaries under ERISA. While ERISA describes three ways in which a person might be considered a “fiduciary,” this article focuses on just one of those ways: providing investment advice. For an estate-planning attorney to be held to the legal requirements of ERISA’s fiduciary standards, with respect to his advice regarding an IRA or 401(K) plan, the advice must qualify as investment advice. In 1975, the DOL issued a definition of “investment advice” under ERISA Section 3(21), which included a five-part test. Under the 1975 definition of investment advice, estate-planning recommendations were unlikely to trigger the ERISA fiduciary standard, as estate-planning advice typically wasn’t related to the investing, purchasing or selling of securities or other property, nor was it delivered on a regular basis to the client.
Newly Expanded Definition
In an attempt to further regulate rollovers and remove some perceived abuses, the DOL decided to expand the definition of investment advice for both ERISA and the IRC. Additionally, the DOL revamped a number of prohibited transaction exemptions. What might surprise some people is that the DOL is authorized to redefine non-ERISA tax provisions relating to the standard of care required when providing advice to IRAs. While estate planners generally fell outside the scope of ERISA’s fiduciary requirements under the 1975 “investment advice” definition, the new 2016 definition is far more expansive.
The DOL acknowledged the concern that the legal services provided by an attorney could now cause that attorney to be considered an investment advice fiduciary by stating that “in the Department’s view, the provisions in the final rule defining investment advice make it clear that attorneys, accountants and actuaries would not be treated as investment advice fiduciaries merely because they provide such professional assistance in connection with a particular investment transaction.” However, the DOL went further to state that, “when these professionals act outside their normal roles and recommend specific investments in connection with particular investment transactions, or otherwise engage in the provision of fiduciary investment advice as defined under the final rule, … they [would] be subject to the fiduciary definition.”
Avoid Triggering Responsibility
When might an attorney act outside of his typical role and engage in another provision of the new definition of fiduciary investment advice? The new definition of investment advice has been expanded to include “recommendations with respect to rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer, or distribution should be made.” The importance of this additional language can’t be understated. Recommendations to engage in rollovers, transfers or distributions weren’t considered investment advice until now. This new definition marks the first time under ERISA that a recommendation not related to a specific investment can be considered investment advice. This means that merely recommending where the investment is held or how it is distributed could trigger fiduciary responsibility. Additionally, the requirement that the advice be on “a regular basis” was removed, meaning that an estate-planning advisor may be subject to ERISA’s fiduciary requirements based on a one-time communication. Here are some areas where attorneys must be wary not to run afoul of the new rule.
Explanation of tax or legal consequences. What’s clear from the rule is that an attorney doesn’t render investment advice if he merely limits the advice to explaining the tax or legal consequences of a transaction or document. This means that attorneys need to be careful, clear and concise with their language and advice. Attorneys must pay special attention to their language and steer clear of recommendations regarding retirement accounts to avoid providing investment advice as newly defined.
Retirement distributions. Based on a plain reading of the new definition of investment advice, providing a recommendation about how an IRA or 401(K) should be distributed once a client passes away, by recommending the appropriate beneficiaries and contingent beneficiaries, could be considered a distribution recommendation. Or, at a minimum, advice about where the account should be transferred on the owner’s death. If an attorney goes one step further by providing advice as to the percentage that each IRA or 401(K) beneficiary should receive to provide maximum tax efficiency or other estate benefits, it’s possible that this advice would qualify as investment advice under the new definition.
RMDs. There are other areas of estate-planning advice that fall more squarely into the new definition of investment advice. For instance, recommendations to a client about his RMDs would be reasonably construed as investment advice. If the attorney goes so far as to recommend a specific IRA for the client’s RMD, he’s likely provided investment advice under the rule. Additionally, estate-planning attorneys are often assisting clients with RMD planning in the event of an IRA or 401(K) inheritance. In this case, the client might even be seeking advice as to how much, when and in what form he should take RMDs. Under the new definition, failure to advise a client about the tax benefits and legal ramifications of RMDs could subject the attorney to liability.
Conversion to Roth IRA. Converting an IRA to a Roth IRA can often help reduce state death taxes and federal estate taxes by substantially lowering the value of the taxable estate through removing the income tax paid on the conversion. However, recommendations regarding Roth conversions would involve a rollover because the money from the IRA is rolled over or transferred to the Roth IRA as part of the conversion. Consequently, this recommendation could also be subject to the new definition of investment advice.
Medicaid spending. If an attorney recommends that the client liquidate his IRA or 401(K) in anticipation of spending down assets to qualify for Medicaid, this liquidation or distribution advice would likely be considered investment advice.
Traditional estate-planning advice. While the scope of the new definition isn’t yet thoroughly understood, traditional estate-planning advice touches on a number of distribution aspects of IRAs and 401(K)s, which could subject an attorney to the ERISA fiduciary standard of care. The reality of the situation is that, in some cases, an attorney might need to provide “investment advice” to properly address all of a client’s assets, risks and tax issues, protect the tax-advantaged growth of the accounts and create efficient transfers.
The New World Order Under ERISA
Real questions have been raised as to the scope and extent that traditional estate-planning advice will be subjected to the ERISA fiduciary standard under the new definition of investment advice. It also raises concerns for attorneys about co-fiduciary liability situations, the type of advice the attorney should provide with regard to retirement plans and IRAs and the scope of an attorney’s professional liability insurance coverage. Moving forward, it will be important for attorneys to monitor the development of the rule and any further guidance that’s provided as to the meaning of investment advice. It’s also important to make inquiries with any malpractice insurance to ensure that one is covered for breach of an ERISA fiduciary claim in the event of a failure to provide prudent investment advice.
This is an adapted version of the author's original article in the May issue of Trusts & Estates.