Common Trust and Estate Fiduciary Responsibilities
Anyone who accepts the role of personal representative, administrator, trustee, guardian, or attorney-in-fact under a durable power of attorney should be fully aware of the legal responsibilities of these roles. By acting as a fiduciary, a person is assuming responsibility for assets that belong to another person and is required to carry out his duties with the utmost care. The fiduciary must act in the best interests of those with an interest in the property. The person serving as a personal representative, administrator, trustee, guardian or attorney-in-fact must be willing and able to perform all the tasks required by the position, either individually or by engaging and overseeing, where appropriate, legal, accounting and investment professionals to advise that person in areas of specific expertise.
A person acting as a fiduciary must keep the fiduciary assets in accounts separate from his own personal assets and cannot use the fiduciary assets for his personal gain. A person acting as a fiduciary must maintain careful and accurate records of all transactions involving the fiduciary assets and may need to account to a court for all actions taken with respect to those assets. A person acting as a fiduciary is entitled to reasonable compensation for time spent as a fiduciary, but cannot collect excessive sums. Investments of fiduciary assets must be prudent; they should not be speculative. A fiduciary should communicate with those who have a beneficial interest in the fiduciary assets. Failure to fulfill these duties may result in civil or criminal penalties for the fiduciary, and a person should only accept the role of fiduciary after a careful consideration of the serious responsibilities.
This article is intended to provide some general guidelines regarding the roles and responsibilities of various fiduciaries and is intended to help such financial agents avoid traps for the unwary.
To settle a probate estate, a personal representative or executor (depending on the jurisdiction, different terms are used), is required to identify and collect all of the estate assets, and adhere to the directions in the Will regarding the distribution of such assets. A personal representative may include one or more individuals and/or institutions, such as banks or trust companies. The personal representative's many duties include filing the decedent's Will with the local probate court and overseeing the court proceedings required to have the Will recognized by the probate court. In addition, the executor must, within applicable time limits, prepare and file complete and accurate tax returns for the decedent's estate, including estate tax returns and estate income tax returns. This involves gathering information and values for all assets includable in the decedent's taxable estate, including assets held by trustees and beneficiaries other than the personal representative. If taxes are due, the personal representative must make decisions about how to generate funds to pay such taxes, and the personal representative may be authorized or directed to sell real estate or other assets. The personal representative must also satisfy the debts of the decedent (including the decedent's income tax liability for year of death) and pay the expenses of administering the estate from estate assets, taking into account applicable time limits within which creditors may file claims against the estate.
A personal representative's power generally extends to probate assets, which are the assets held by the decedent in his individual name and which are subject to the jurisdiction of the probate court. A personal representative's power generally does not extend to jointly owned property, which passes to the surviving owner(s) upon death, life insurance policies, retirement accounts and transfer-on-death accounts, which pass upon death to the beneficiaries designated by the decedent. Assets held in a trust, which the decedent established and funded before death, would also remain under the control of the trustee and would generally not be subject to the probate process.
An administrator serves as a personal representative for an estate in which the decedent did not leave a valid Will or in which the named personal representative or executor was unable to serve or to complete the probate process. If there was no valid Will, the administrator must distribute probate property to the beneficiaries identified by and in the proportions specified by state law. The administrator also must oversee any necessary probate court proceedings, the collection and valuation of probate assets, the preparation of tax returns and the payment of taxes, debts and expenses, as described above.
A trustee is a fiduciary entrusted with assets to be managed for the benefit of individuals known as beneficiaries, pursuant to authority provided in a contract, known as a trust. It is the duty of the trustee to carry out the terms of the trust. A trustee may be one or more individuals and/or institutions, such as a bank or trust company. A trustee has a range of duties, including investment and management of trust assets, overseeing distributions from the trust to the trust beneficiaries, and general administrative duties.
The trustee must manage and invest the trust assets. This requires careful oversight of the trust property and a balance of the needs of current trust beneficiaries for income from the trust assets with the needs of future trust beneficiaries for a reasonable amount of appreciation in value of the underlying trust assets. In addition, the trustee should have a good understanding of the income and estate tax attributes of the particular trust, for the trust, and for the beneficiaries.
Distributions from a trust are governed by the terms of the trust instrument. Many trusts specifically describe the situations in which distributions may be made to trust beneficiaries. For example, a trust may require that all income be distributed to a beneficiary or permit distributions only for a beneficiary's health, maintenance, support or education. Some trusts give the trustee full discretion to make distributions to a beneficiary for any purpose.
Where the criteria for distributions are not defined specifically, the trustee must consider the intent of the donor of the trust and the needs of both the current and future beneficiaries of the trust. The trustee must be able to monitor the needs of the trust beneficiaries to decide when discretionary distributions are appropriate, and should understand when and if a beneficiary's other resources must be considered.
Administration of the trust involves careful record keeping, including identifying all receipts and distributions of trust property, listing all investments and sales of trust assets, where necessary filing accounts with the probate court, and the preparation and filing of necessary tax returns.
A guardian may be charged with custody of the assets of a person (the "ward"), or physical custody of the ward, or both. Guardianship may arise when a person is incapacitated due to mental or physical illness, including when the ward is a minor.
Guardians may be nominated by an adult in a durable power of attorney signed before the adult became incapacitated, and guardians for a minor child may be nominated by the child's parents in a validly executed Will. A guardian of the property of a ward must manage the ward's assets in the ward's best interests. The guardian must make distributions of the ward's property to pay necessary expenses, invest the property in a prudent fashion, keep careful records of transactions involving the ward's property, prepare and file tax returns, and prepare and file probate court accountings, where required.
A guardian of the person of the ward must make decisions about where the ward will live, what medical treatments the ward will receive, and, if appropriate, what school the ward will attend. If the guardian of the person does not also have custody of the ward's assets, the guardian must request funds from the person in possession of the property (usually the guardian of the property, or a trustee).
An attorney-in-fact is a person named to act for another (the "principal") for limited or general legal purposes as described in a document called a power of attorney. Like a guardian, an attorney-in-fact must act in the best interests of the principal at all times and must account to the principal for all actions taken under the authority granted in the durable power of attorney.
Powers of Attorney take many forms and can offer a wide range of responsibilities for the attorney-in-fact. An attorney-in-fact under a limited power of attorney may be given the authority to perform a distinct task, such as representing the principal at a real estate closing because the principal is in the hospital. An attorney-in-fact might also have the limited role of performing banking transactions for an elderly principal who is unable to leave his home to do regular banking.
A general power of attorney may authorize an attorney-in-fact to perform every act which the principal could do himself. In this circumstance, an attorney-in-fact might need to perform all the financial transactions for a principal who was unavailable due to illness or travel. In most circumstances, an attorney-in-fact serving along with a health care agent or other person appointed in a medical directive (sometimes called a health care proxy or a durable power of attorney for health care) can manage all the principal's financial and personal affairs without the need for a court appointed guardian.
A durable power of attorney is often designed to deal with possible incapacity. The document may be "springing" and become effective when a physician certifies the principal's incapacity. In other instances, the durable power of attorney becomes effective at the signing of the document with a provision that it remain effective in the event of the principal's incapacity.