A VA fiduciary account avoids probate despite standard thinking that the account requires probate since no beneficiary was named.
When a beneficiary is unable to manage his or her affairs due to injury, illness, or infirmities of age, the Veterans Administration will appoint a fiduciary. The fiduciary is bonded and reports to the VA how the funds are used. This appointment will occur despite existing powers of attorney or a guardianship order. The fiduciary role is to protect these funds on behalf the beneficiary. Federal law makes this clear. For instance, federal law prohibits a fiduciary from assigning benefits to a third party, and those benefits cannot be seized by creditors.
Nonassignability and exempt status of benefits
(a)(1) Payments of benefits due … under any law administered by the Secretary shall not be assignable except to the extent specifically authorized by law, and such payments made to, or on account of, a beneficiary … shall be exempt from the claim of creditors, and shall not be liable to attachment, levy, or seizure by or under any legal or equitable process whatever, either before or after receipt by the beneficiary.
38 U.S.C. § 5301
When a VA beneficiary dies, it is general practice to probate the VA fiduciary accounts to transfer significant dollars according to the testamentary intent stated in the will or by intestacy. By using the probate process to transfer the funds, however, the funds are subject to claims of creditors. Many estates are at risk for liens for the cost of their care. But, much like the intestacy statute, the VA fiduciary is mandated to distribute remaining unused funds to the family of the veteran.
Often, elder law attorneys will help a client avoid probate by naming a beneficiary on the depository agreement of the financial institution account. Due to the representative payee nature of the VA fiduciary account, however, the fiduciary is not permitted to name a beneficiary. Fortunately, federal law specifies a distribution outside of probate.
When a beneficiary dies, the fiduciary shall distribute to the spouse and, if the spouse is not living, then to the children.
In the event of the death of a mentally incompetent or insane veteran, all gratuitous benefits under laws administered by the Secretary deposited before or after August 7, 1959, in the personal funds of patients trust fund on account of such veteran shall not be paid to the personal representative of such veteran, but shall be paid to the following persons living at the time of settlement, and in the order named: The surviving spouse, the children (without regard to age or marital status) in equal parts, and the dependent parents of such veteran, in equal parts.
38 U.S.C. § 5502 (d)
Financial institutions have expressed a lack of awareness of the law in this area. When brought to the attention of legal counsel, financial institutions to date have honored federal law and made distributions outside of probate, avoiding estate claims. Providing an affidavit of heirs is the proper tool to use when requesting the distribution of unused funds. Be aware, the VA is increasing oversight of the actions of a veteran’s fiduciary, and lawyers giving advice in the area are at risk for malpractice claims.