In your lifetime, you may be asked to act on behalf of a family member or friend. This could be being named as agent under a power of attorney, as executor under a will, or as trustee for a trust, for example. Then, if that person who named you becomes incapacitated or dies, you step in and fulfill your duties by managing the person's affairs, whether that be banking, probating the estate, or even caring for money for the person's children.
When you are named as a trustee, executor of a person’s will, or agent under a power of attorney, the law calls you a “fiduciary.” And this means that you have a legal duty to act in the best interests of the person who has named you—selflessly, in other words—and sometimes too in the best interest of beneficiaries. You must act loyally and in good faith.
When you hold the role as a fiduciary for someone, you have specific duties and responsibilities. For example, unless specifically allowed when you were named, you are not allowed to use the person’s property for your own profit. You also may not give gifts to yourself or others if the person has not authorized you to do that. You may not mingle the person’s property with your own. And if you spend the person’s money, you must carefully document the amount you spend and for what purpose.
The fiduciary relationship imposes the highest duty in law. If you violate that duty, you may become personally liable.
A recent New Jersey probate case shows what can go wrong. Mother Christine named Patricia, one of her daughters, to be executor of Christine’s will. After Christine’s death, her other daughter, Diane, received a check from Christine’s estate for only $10,000. The problem? Christine’s house had sold for nearly $230,000.
Diane filed a suit with the court. The judge ordered the fiduciary Patricia to produce an accounting of where all that money had gone. An accounting is an inventory of estate assets and a record of all income and expenses. Patricia would not do so and was thus removed as executor. When Diane was appointed as the new executor, she learned through an examination of the tax documents that despite a gross estate value of $319,368, the estate bank account contained only $6,886. Things looked bad for Patricia.
Patricia, as fiduciary, had a responsibility to explain where the money had gone. She claimed she had spent $40,000 on what she said were home repair expenses. But she could produce no building permits. She had also given herself $110,000 as “fees” for her executor duties (some of which went to her then-fiancé), plus a gift to herself of $27,000. Such a fee was grossly excessive and unexplained, and the gift was not authorized.
After reviewing the evidence, the court ruled against Patricia and entered a judgement against her for over $200,000. An appellate court affirmed that decision (but asked the trial court to recalculate its damages). The case is In re Cenaffra, and can be found here.
One might think, "Okay, so Patrica pays the money back, and everything is fine." But consider how much Diane had to go through to straighten everything out. And consider how much money was spent in attorneys' fees and court costs. No one won in this situation.
Most people are not like Patricia. If you are named as guardian, agent under a power of attorney, or executor, follow a few simple principles. Make sure you don’t personally benefit from what you do with the other person’s property unless that is expressly authorized. You might be compensated fairly for your work, but refrain from doing anything that might look like a conflict of interest. If there are other beneficiaries waiting to receive their inheritances, be transparent. Keep the beneficiaries informed. Write down why you acted as you did, at the time you acted. And especially important: document everything, and keep receipts.
If you are the one who is thinking about whom you would like to name as your fiduciaries, you must be sure you trust that person absolutely. It is also important to talk to whomever you have named to make sure the person understands what you want and to make sure the person is willing to serve in that role.
The role of each fiduciary in an estate plan differs. (For more about each role, see here.) You might want one person to handle your finances and such while you are still alive (the agent under a power of attorney), but you might want another person making your medical decisions. You might still want someone else handling the duties of a trust that could last for several decades (for example, when planning for minor children.)
If you have questions or would like to discuss your particular situation, please don’t hesitate to reach out. I help people determine who should act in their best interests, and I can help those who are already named. Please contact McCreary Law Office or call the Jacksonville, FL office at 904-425-9046 or the Houston, TX office at 713-568-8600.
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