The Lawletter Vol 40 No 2
Matt McDavitt, Senior Attorney, National Legal Research Group
One problematic issue regarding the administration of probate or intestate estates is that in which the property of mentally or physically incapacitated persons is found to have been significantly depleted through lifetime transfers in the period just prior to death. The Virginia Supreme Court recently addressed this problem, establishing that where such lifetime transfers benefit persons standing in a confidential relationship to the grantor, a rebuttable presumption of fraud arises so as to protect decedent estates from the depredations by third parties upon whom the decedent relied at the end of life.
In Ayers v. Shaffer, 286 Va. 212, 748 S.E.2d 83 (2013), the Virginia Supreme Court considered whether the circuit court had erred in sustaining a demurrer to an 11-count complaint that certain inter vivos transfers that had significantly reduced a decedent's probate estate were the result of undue influence exercised by persons in a confidential relationship with the decedent during her lifetime. In Ayers, due to issues with the decedent's physical and mental capacity, a friend and a sister of the decedent's had been assisting her with her finances in the years leading up to her death. The friend held power of attorney for the decedent. Just before the decedent's death, the friend and the sister took her to the various banks where she held accounts, and the incapacitated account owner allegedly executed pay-on-death forms, nominating her attorney-in-fact friend, the friend's family members, and her own sister as the pay-on-death beneficiaries on these accounts. Such transactions served to divert an estimated $400,000 from the decedent's probate estate, prompting the beneficiaries under her will to sue the friend and the sister for raiding the decedent's estate inter vivos.
The defendants claimed that the transactions were proper, given that the account owner had allegedly participated in the pay-on-death beneficiary nominations and the attorney-in-fact friend had signed solely in her personal capacity, never as the decedent's agent. The benefited agent and the sister won at the trial level and on appeal.
The supreme court reviewed its precedents regarding when a presumption of undue influence arises and when to set aside a transaction benefiting a party in a confidential relationship with the alleged grantor, holding that the plaintiff alleging undue influence establishes a rebuttable presumption of the impropriety of the disputed transactions where he or she can show either (1) the grantor's weakness of mind and significant benefit to the donee, or (2) that a confidential relationship existed between the parties at the time of the disputed transactions:
A confidential relationship "springs from any fiduciary relationship, and when such relationship is found to exist, any transaction to the benefit of the dominant party and to the detriment of the other is presumptively fraudulent." Nicholson v. Shockey, 192 Va. 270, 278, 64 S.E.2d 813, 817 (1951)(emphasis added). Thus, whenever a fiduciary relationship exists between parties, the existence of one or more transactions which benefit the party who owes a fiduciary duty to the other shifts the burden of proving the bona fides of the transaction to the party owing the duty. Id. at 277, 64 S.E.2d at 817. It is not necessary that the transaction be accomplished directly as a result of the fiduciary relationship, but rather, it is the fact that "a confidential relationship existed between the parties at the time of the transaction" that gives rise to the presumption and the shifting of the burden of going forward with the evidence. Diehl v. Butts, 255 Va. 482, 489, 499 S.E.2d 833, 838 (1998); Friendly Ice Cream Corp., 268 Va. at 33, 597 S.E.2d at 39.
From this summary of the law, it is clear that to survive a demurrer, a complaint seeking to set aside a contract or other transaction favorable to a defendant or her interests because of undue influence by the defendant must allege either that  because of great weakness of mind of the other party the defendant obtained the bargain for grossly inadequate consideration or under some other circumstance of suspicion, or alternately that  a confidential relationship existed between the parties at the time of a transaction beneficial to the defendant, even in the absence of other suspicious circumstances. Both allegations will support a finding of undue influence resulting in a fraudulent transaction, and may be pled independently or in the alternative.
Id. at 225-26, 748 S.E.2d at 91 (bracketed numbers added) (bold emphasis added; italic emphasis the court's). "Importantly, [where the benefited party was serving as agent of the grantor at the time of the transactions complained of], the presumption of undue influence will arise independently of any evidence of actual fraud, or of any limitations of . . . [mental] capacity in the other party to the confidential relationship, and is intended to protect the other party from the influence naturally present in such a confidential relationship." Id. at 225, 748 S.E.2d at 91 (alteration omitted) (bold emphasis added; italic emphasis the court's) (internal quotation marks omitted). Therefore, the supreme court reversed the circuit court's judgment sustaining the demurrer as to the counts alleging breach of fiduciary duty, existence of a confidential relationship, undue influence, and seeking rescission of the improper transactions, remanding the case to the circuit court for further proceedings.