What if you find yourself acting as someone’s agent under a financial power of attorney? Or if you assume the responsibilities as a personal representative (executor) or as a successor trustee? In all three of these roles, you have fiduciary duties prescribed by the law. You can now also have very serious criminal and civil penalties for breaching those duties. Although I rarely see the penalties invoked, for a variety of reasons, I do often see large amounts of money expended in legal fees defending or prosecuting breaches of fiduciary duties. This article (chapter) will address the duties that apply to all three of these roles – agent under a power of attorney, personal representative in a will, or successor trustee of a trust.
Many of the requirements are counter-intuitive. It is easy to violate the law regarding fiduciary duties, while trying very hard to carry out the intent of the person who appointed you. But sometimes, what they intended just doesn’t matter. That intent must be expressed in the proper way, and all too frequently, it is not
What is a fiduciary? A fiduciary is someone who is in a position of trust and confidence to someone else, usually in regard to taking care of money for that other person. This relationship is considered to be the highest legal and ethical standard of care. A fiduciary responsibility exists between a trustee, and a beneficiary of a trust, and between an agent and principal of a power of attorney. The principal is the person who appointed the agent. The personal representative, also known as the executor, of an estate is a fiduciary to devisees (people who receive property under a will), heirs (people who would inherit if there was no will), and creditors. Guardians and conservators are also fiduciaries.
Some people are specifically referred to as fiduciary in their title. Many states license or certify private fiduciaries who can serve in roles such as agent under a power of attorney, personal representative, or trustee. These individuals and firms often act in that capacity for estates, in the same way a trust company or bank will sometimes serve as a trustee. All have a fiduciary relationship and must observe fiduciary duties. Fiduciary duties, whatever the role, include a duty of loyalty, duty of care, duty of impartiality, and prudent administration.
Most jurisdictions also have a public fiduciary who is often assigned to take over and control assets of someone who is incapacitated and has no one else to serve in that role. Often these public fiduciaries have a number of other roles they play, often settling estates of individuals when no one else is available, and assisting with disposing assets of indigent people and making their final arrangements. The public fiduciary is often considered the fiduciary of last resort.
A good rule of thumb for the fiduciary is to avoid doing anything to benefit themselves or a family member. With a power of attorney, the agent is often entrusted with financial assets. These assets do not belong to the agent and can only be used for the benefit of the principal. Exceptions to this rule are that the court can approve a deviation, or the principal can authorize a deviation. That authorization, however, should be within the document or otherwise in writing. The principal may, for example, include a gifting provision in the power of attorney document and indicate the agent may make gifts to himself. In some cases, the agent can make gifts to others, but not himself, and in other cases can make no gifts at all. These distinctions must be made within the power of attorney document.
A fiduciary who is named in any role such as agent under a power of attorney, personal representative in a will, or as a successor trustee, may or may not be entitled to payment for their services. The document will often specify that the fiduciary can be paid a reasonable amount, or sometimes a fixed fee. Sometimes, I see documents indicate a fiduciary is to be paid only if they are not related to the person naming them, or, if they are not a beneficiary. Some documents indicate no one can be compensated for their work. If the document does not address compensation at all, the law allows reasonable compensation for services and reimbursement for expenses. The work may be considerable, and the responsibilities are huge. Many people will decline the job if they are not compensated for their time. Of course, if choosing an institution like a trust company or a professional fiduciary, they will be paid or decline the job.
Sometimes, when the appointed fiduciary is a friend or relative, duties and responsibilities may be influenced by the knowledge the fiduciary has of the person for whom they are fiduciary. This can result in an inadvertent and even an innocent breach. For example, someone is appointed agent under a power of attorney for a parent who is incapacitated, and the incapacitated person can no longer drive. In the past the principal had told the agent, and others that he wanted to give the car to the person named as agent. If the agent uses the power of attorney to transfer the vehicle to himself, and the document does not specifically authorize that gift, this would be a breach of fiduciary duty. Agents must be extremely careful not to use the power of attorney to transfer property to themselves, even if just for convenience.
Sometimes, when the principal is incapacitated and very ill at the end of life, the agent will begin moving assets in anticipation of death. Don’t do it. In one case I had, the client was agent under a power of attorney for her grandfather. The principal (grandfather) was on hospice and his death was imminent. He had an estate plan that left everything to his granddaughter – the same person who was the agent. In the weeks before his death, the granddaughter, as agent, began writing checks to herself and other family members thinking it would be easier and would avoid hassles after his death. This action on the part of the agent was a breach of her fiduciary duties and was challenged by other relatives. Those relatives hoped she would be found to have breached her duties, financially exploited her grandfather, and forced to repay double what she transferred. Those other relatives then would have asked the offending granddaughter be disinherited, allowing everything to pass to the other relatives. The case eventually resolved in favor of my client, but not until tens of thousands of dollars had been spent on legal fees.
In Arizona, such breaches may be interpreted as exploitation of a vulnerable adult, and can result in the serious penalties noted above. Some of those penalties include repaying double the amount taken, paying attorney fees and court costs for the person bringing the action, and even being disinherited. The person who is found to have exploited the vulnerable adult can be precluded from receiving any gift from a will or trust, any life insurance policy, or any other account for which the exploiter was a beneficiary.
Joint accounts also hold conditions to be aware of. Many people will put a child or another person on their account, as a joint owner, for convenience. First, this is rarely advisable or necessary. Someone can be added to an account as a signer (usually through a power of attorney) and can also be designated as a beneficiary of an account (transfer on death or pay on death) so the account goes to that person after death. If, however, someone is placed on an account as a joint owner, under Arizona law and the law of many other jurisdictions, while both owners are alive the money in that account only belongs to the person in proportion to what they contributed. If your parent has listed you as a joint owner on their account, and you have never deposited any of your money into the account, you cannot use money in that account for your own benefit without the authorization of the other owner. Of course, the financial institution will allow you to make withdrawals and they do not police the accounts. The joint owner of an account will own the account upon the death of the other owner. The argument, “It’s going to be mine one day anyway” is not a justification for raiding the account before the other owner dies.
Acting as a fiduciary is a huge responsibility and acting in that capacity can be particularly perilous. A properly drafted document can go a long way in protecting both the principal and fiduciary. It is well worth the expense to meet with an experienced estate planning attorney who will know what questions to ask and what clauses to include in a document to make sure the principal’s intent is followed and the agent is able to act in a manner most consistent with what the principal wanted. As always, proper planning can often prevent damaged relationships and save a great deal in future legal fees, time, and other expense.