CONSIDERATIONS INVOLVING FIDUCIARY SELECTION
By Stuart C. Bear
Minneapolis, Minnesota 1 2
|Fiduciary selection is crucial to the success of an estate and disability plan. Even a great plan can go awry if a fiduciary fails to uphold his or her fiduciary duties or fails to follow the terms of the Will or Trust. Add family dynamics to an already stressful situation and things go from bad to worse.|
I. Introduction and overview.
Fiduciary selection should not be as straightforward as asking the client who he or she wants to nominate as his or her fiduciaries. Inevitably a client will select his or her spouse, followed by his or her children. The selection should be made only after a thoughtful discussion that addresses the complexity of the client’s estate and his or her family’s dynamics and explores the possibility of naming an independent third party (such as a family friend or business partner) or corporate trustee.
“Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.”3
II. Fiduciary roles.
Common fiduciary roles within a given estate plan include the attorney-in-fact, health care agent, personal representative and trustee.
The Financial Power of Attorney (“POA”), a staple of every estate and disability plan, has been described as many things, “a simple yet powerful tool,” 4 “a license to steal,”5 and “the most effective burglary tool since the crowbar.” 6
A POA is a legal document in which an individual (the “principal”) authorizes a third party (the “attorney-in-fact”) to act on the principal’s behalf. Because a POA establishes an agency relationship between the principal and the attorney-in-fact, it is governed by common law and state statutes.7
In addition to statutory regulation, considerable regulation of POAs exists in the private sector; thus, many banks and financial institutions have special regulations regarding what documents they recognize as valid POAs and may regulate how and when POAs must be presented to the institution and the duration and manner of such recognition.8 While these internal rules cannot be used to invalidate a power that has otherwise validly been granted and recognized as valid by statute, the attorney-in-fact may be subject to particular reasonable restrictions on the manner of presentation of a power.9
An attorney-in-fact’s duties are listed in the POA and supplemented by state statutes. Twenty-five states have enacted the Uniform Power of Attorney Act (“UPOAA”).10 It is good practice to incorporate the statutory powers within the POA and not merely reference “all powers granted under state law.” Absent express language eliminating a given power, the attorney-in-fact has the authority to perform all powers listed in state statutes. For example, most state statutes allow the attorney-in-fact to sell real estate; if the principal does not want to grant the attorney-in-fact this authority, he or she should expressly state the attorney-in-fact is not authorized to sell real estate.
Regardless of the scope of an attorney-in-fact’s authority, he or she must: (1) act in accordance with the principal’s reasonable expectations to the extent actually known by the attorney-in-fact and, otherwise, in the principal’s best interest; (2) act in good faith; (3) act only within the scope of authority granted in the Power of Attorney; (4) act loyally for the principal’s benefit; (5) act so as not to create a conflict of interest that impairs the attorney-in-fact’s ability to act impartially in the principal’s best interest; and (6) act with the care, competence, and diligence ordinarily exercised by attorneys-in-fact in similar circumstances.11
B. Health care agent.
A health care agent (“agent”) is a fiduciary given control and power over medical decisions if the principal is incapacitated. Generally, an agent has a duty to: (1) act in good faith and (2) to make health care decisions authorized by the Health Care Directive (“HCD”), but this obligation does not constitute a legal duty to act. An agent acting pursuant to an HCD has the same right as the principal to receive, review, and obtain copies of medical records of the principal, and to consent to the disclosure of medical records of the principal, unless the principal has otherwise specified in the HCD.
C. Personal representative.
The personal representative (sometimes referred to as the executor/executrix) manages probate assets upon an individual’s death. The personal representative is nominated in an individual’s Will, and must be appointed by the court, regardless of whether the individual died testate or intestate. Letters of General Administration/Letters Testamentary evidence a personal representative’s authority to act on behalf an estate.
A personal representative’s duties are specified in the Will and unless a duty is expressly excluded, additional duties are supplemented by state statutes. The Uniform Probate Code (“UPC”), currently enacted by 18 states,12 sets forth a personal representative’s duties.
A personal representative is a fiduciary who shall observe the standards of care applicable to trustees as discussed below.13 Additionally, a personal representative is under a duty to settle and distribute the estate of the decedent in accordance with the terms of any probated and effective Will, and as expeditiously and efficiently as is consistent with the best interests of the estate.
A trustee’s authority is limited to trust-owned assets. Certain assets, such as bank accounts, retirement accounts, and life insurance policies may not be owned by the trust, and are therefore managed by the attorney-in-fact during the settlor’s lifetime. This distinction may be trivial as the same individual is often appointed as both trustee and attorney-in-fact. Generally, a trustee’s authority begins upon the settlor’s incapacity and his or her authority terminates when the trust has been fully administered and all assets have been distributed to the settlor’s beneficiaries.
A trustee’s duties are specified in both the trust instrument and supplemented by state statutes. The Uniform trust Code (“UTC”), currently enacted in 32 states and the District of Columbia, sets for a trustee’s duties.14
III. Fiduciary selection.
In the estate planning context, the lawyer should discuss with the client the functions that a personal representative, trustee, or other fiduciary will perform in the client’s estate plan. In addition, the lawyer should describe to the client the role that the lawyer for the personal representative, trustee, or other fiduciary usually plays in the administration of the fiduciary estate, including the possibility that the lawyer for the fiduciary may owe duties to the beneficiaries of the fiduciary estate. The lawyer should be alert to the multiplicity of relationships and challenging ethical issues that may arise, particularly when the client has a personal interest in the subject matter of the representation in addition to a fiduciary role.15
Many clients wish to appoint a spouse/partner followed by adult children to serve as fiduciaries. Unless the practitioner asks probing questions to establish a sense of a client’s family dynamics, he or she is unable to make a thoughtful recommendation regarding fiduciary selection. While a client’s children may be business professionals, they may not have the requisite skillset or availability to serve as a fiduciary. The practitioner should discuss the use of a corporate fiduciary if his or her client is hesitant to name his or her children.
- Fiduciary protector.
- Appointing an individual as POA Protector or Trust Protector to oversee the fiduciary and to authorize that individual to remove the fiduciary with or without cause allows the elder to protect against unforeseen circumstances that may lead a fiduciary to intentionally breach his or her fiduciary duties. Additionally, if an attorney-in-fact who failed to follow his or her fiduciary duties is also nominated as personal representative, consider objecting to his or her appointment.
- Appointment of successor.
- The practitioner should consult with the client regarding the ability of a fiduciary to appoint his or her successor. Consider the following scenario: clients have three children. Client’s trust appoints child 1, followed by child 2, followed by child 3 in all fiduciary roles. Child 1 begins serving and things become extremely dysfunctional with the siblings. If child 1 resigns, child 2 would be the successor. Child 1 may decide to continue serving despite the dysfunction because the siblings are unwilling to consent to the appointment of a neutral successor. Had the documents authorized child 1 to appoint a successor, a neutral fiduciary could have been appointed without obtaining child 2 and child 3’s consent.
B. Family meeting.
To facilitate sharing this information, I offer to conduct a family meeting at my office. I strongly recommend a family meeting when: (1) assets are distributed unequally (whether actual or perceived) between children, (2) specific assets (i.e. family cabin or family business) are distributed to specific children, (3) there is a second marriage or blended family, or (4) there is a hierarchy in the nomination of fiduciaries. The goal of the family meeting is to avoid surprises and conflict between loved ones after death.
An estate plan is most effective when everyone is on the same page. To get everyone on the same page everyone needs to be in the same room. Fewer issues arise after death when the children, their spouses, and the nominated fiduciaries all have an opportunity to voice their opinions and concerns. The most common dilemma is whether to invite the children’s spouses; I prefer they attend to control the message and reduce conflict between children because the spouses perceive something as unfair. Additionally, I strongly encourage the entire “team” of professional advisors to attend. Communication and collaboration enable each advisor to provide a higher level of service.
The focus of the family meeting is “big picture” details of the estate plan. Sending an outline prior to the meeting allows everyone to prepare questions, which results in better dialogue and ultimately a more effective meeting.
C. Ideal characteristics.
- Financial stability.
- Emotional stability.
- Able to identify personal strengths and weaknesses.
- Asks questions if uncertain.
- Follows directions.
- Detail oriented.
- Emotional intelligence.
D. Individual fiduciary vs. corporate fiduciary.
Many clients prefer to appoint individuals, especially family members, to serve in various fiduciary roles. While this may be fine in certain circumstances the practitioner should have a discussion regarding the duties of each fiduciary and the reasons an individual or corporate fiduciary may be more appropriate. There is no general rule for when an individual is better suited than a corporate fiduciary and vice versa, but corporate fiduciaries may be more appropriate when: (1) there is a blended family, (2) the estate is comprised of complex assets (e.g. closely held businesses), (3) assets are distributed in trust to be administered over a long period of time, (4) assets are held in a supplemental needs trust, (5) there is dysfunction among beneficiaries, and (6) there are significant tax considerations based upon the value of the estate.
- Why nominate an individual fiduciary?
- a. Familiar with client’s values.
- Presumably the family member, close family friend, or business partner has insight into the client’s values. Clients often distribute assets in trust for their beneficiaries and include provisions that permit discretionary distributions such as distributions for the need for transportation, entering into a marriage, starting or expanding a family, buying a home, or entering into a business or professional practice. An individual may understand the client would have purchased a beneficiary a used vehicle and not a Range Rover.
- b. Familiar with family dynamics.
- c. Established relationship with beneficiaries.
- We tend to be more comfortable with individuals we know and have relationships with. Trust beneficiaries may be uncomfortable with or find it burdensome to have to call a corporate fiduciary whenever they need money.
- d. Less expensive?
- Beneficiaries often expect a family member, close family friend, or business partner to waive compensation or receive minimal compensation. Regardless of this expectation, some individuals choose not to receive compensation. The practitioner should encourage the client to specify within his or her documents his or her preference with regard to fiduciary compensation. While the actual fee charged by an individual fiduciary is likely to be less expensive than a corporate fiduciary the total fees associated with an individual may be more expensive if the individual fiduciary hires an attorney, accountant, and/or advisor to manage the estate or trust.
- e. Increased flexibility and accessibility.
- An individual fiduciary is likely more accessible and flexible in making distributions than a corporate fiduciary. Corporate fiduciaries often are conservative with their distributions. Additionally, if a discretionary distribution is requested it is likely the distribution will need to be approved by a committee. Depending on whether the corporate fiduciary is a local bank or a national bank with each officer handling hundreds of cases, it may take time for a beneficiary to receive a distribution. If an individual is the fiduciary and understands the family dynamics they may answer the phone on a Thursday night and make a distribution Friday morning.
- a. Familiar with client’s values.
- Why nominate a corporate fiduciary?
- a. Family harmony.
- If asked, most clients would reduce the amount their family inherited if it resulted in family harmony. Yet, these same clients are often reluctant to nominate a corporate fiduciary because of fees. Appointing a corporate fiduciary allows family members to continue to be family members and prevents dysfunction created because one family member is in a position of power over another. A beneficiary’s reaction to a denial of a distribution request is different when the denial comes from a corporate fiduciary as opposed to a sibling/family member. Eliminating this possibility can go a long way in promoting family harmony.
- b. Experience.
- A corporate fiduciary’s job is administering estates. They have worked with difficult beneficiaries before and have seen all sorts of family issues play out and have dealt with conflict resolution. Corporate fiduciaries also have experience dealing with complex estates which may include ownership interests in corporate entities or rental real estate.
- c. Expertise.
- Corporate fiduciaries have experience interpreting legal documents, preparing accountings, investing assets, and are familiar with requisite tax filings and their fiduciary duties. An individual fiduciary likely has limited or no experience. Whether intentional or unintentional, individual fiduciaries are more likely to breach their fiduciary duties because they are less familiar with interpreting legal documents and may not understand the intricacies of their fiduciary duties.
- d. Objectivity
- Corporate fiduciaries are neutral, objective, and unbiased. An individual fiduciary is much more likely to breach his or her fiduciary duties because of a personal bias towards or against other beneficiaries or due to a conflict of interest.
- e. Continuity.
- While corporate trustees are subject to employee turnover and corporate mergers, it is highly unlikely a corporate fiduciary will cease to exist. Continuity of a corporate fiduciary and its supervision of trust assets may result in better investment and management of trust assets.
- f. Regulated and bonded.
- a. Family harmony.
E. Single fiduciary vs. multiple fiduciaries.
Clients often want to appoint all children as co-fiduciaries so as not to hurt anyone’s feelings. The appointment of co-fiduciaries may be appropriate and beneficial, but should not be based upon preventing someone’s feelings from being hurt. The practitioner should inform the client each co-fiduciary will be responsible and may be liable for his or her fellow co-fiduciary’s breach of fiduciary duty.
- Single fiduciary.
- Logistically things are more efficient when one person is in charge. When co-fiduciaries are appointed one fiduciary inevitably ends up handling a bulk of the work. Things stall waiting for the fiduciary who has “taken a back seat” to act as required. However, if both co-fiduciaries are the type that like to stay on top of things and fail to communicate, they may end up doing things twice. Lack of communication may also result in certain tasks not being completed on a timely basis because each fiduciary though his or her co-fiduciary was “handling that.”Having a family meeting allows the fiduciaries to meet the practitioner who helped implement the client’s plan. If the fiduciary hires the practitioner to assist with the administration less issues are likely to arise.Another reason clients nominate co-fiduciaries is to provide a system of “checks and balances.” There are other methods of providing checks and balances while benefiting from the efficiency of having a single fiduciary. One option is requiring the fiduciary provide the beneficiaries with an accounting on a monthly, quarterly, bi-annually or annual basis. Another option is requiring the fiduciary be bonded. If the main concern is having all children involved it may be as simple as the practitioner cc-ing all children beneficiaries on the correspondence with the fiduciary. The practitioner should inform all parties that he or she represents the fiduciary and obtain the fiduciary’s consent to cc to all parties. If a particular letter seems more sensitive re-confirm with the fiduciary that he or she is okay with all parties receiving the letter.
- Multiple fiduciaries.
- When appointing multiple fiduciaries, it is prudent to specify the requisite number of fiduciaries required to act even if consistent with the statutory default. When a co-fiduciary presents proof of authority, an institution may inquire as to whether he or she can act alone. It for the fiduciary to point to the provision within the document than contact the practitioner to speak with the institution to reference the statute. The default under the UTC is that co-trustees may act by majority decision.16 The default under the UPC is the concurrence of all co-agents is required on all acts connected with the administration and distribution of the estate.17 The default under the UPOAA is that each co-agent may exercise authority independently.
- Section 807 of the UTC Trust Code provides a trustee may delegate to a co-trustee the performance of any duties or powers prudent under the circumstances. But, a co-trustee has a duty to exercise reasonable care to prevent another co-trustee from committing a serious breach of trust and to compel a co-trustee to redress a serious breach of trust.
Even an unambiguous estate plan detailing a client’s wishes for the administration and distribution of his or her estate can go awry if the fiduciary does not abide by the terms of the Will or Trust or breaches his or her fiduciary duties, whether intentionally or through their interpretation of the document. Educating clients on fiduciary selection and fiduciaries on their duties can go a long way to ensure the success of any given estate plan.
1 The content of this article was taken from material prepared for the 53rd Annual Heckerling Institute on Estate Planning sponsored by the University of Miami School of Law, and published by LexisNexis. It is republished with the permission of the Heckerling Institute and the University of Miami School of Law.
2 The author wishes to thank Ryan Prochaska for his invaluable assistance in writing this article.
3 Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545 (1928) (Cardozo, J.).
4 Jennifer L. Rhein. No One In Charge: Durable Powers of Attorney and the Failure to Protect Incapacitated Principals. 17 Elder L.J. 165. (citing Russ ex rel. Schwartz v. Russ, 734 N.W.2d 874, 888 (Wis. 2007)).
5 Vincent J. Russo and Marvin Rachlin. New York Elder Law and Special Needs Practice § 6:3. 2017.
6 Kristen M. Lewis. Financial Abuse of Elders and Other At-Risk Adults. The American Law Institute. Apr. 2015.
7 Michael L.M. Jordan. Durable Powers of Attorney and Health Care Directives § 2:1. (2017).
8 Anne M. Payne. Defending Attorney-in-Fact from Claims Relating to Invalidity of Power of Attorney or Violation of Terms and Duties Thereof. 140 Am. Jur. Trials 185 Section 8.
10 Uniform Law Commission. Legislative Fact Sheet – Power of Attorney. (Alabama, Arkansas, Colorado, Connecticut, Hawaii, Idaho, Iowa, Maine, Maryland, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, Ohio, Pennsylvania, South Carolina, Texas, Utah, Virginia, Washington, West Virginia, Wisconsin, Wyoming). Last visited December 5, 2017.
11 Unif. Power of Attorney Act § 114(a)-(b)(3).
12 Uniform Law Commission. Legislative Fact Sheet – Probate Code. (Alaska, Arizona, Colorado, Hawaii, Idaho, Maine, Massachusetts, Michigan, Minnesota, Montana, Nebraska, New Jersey, New Mexico, North Dakota, Pennsylvania, South Carolina, South Dakota, and Utah). Last visited December 5, 2017.
13 Unif. Prob. Code § 3-703.
14 Uniform Law Commission. Legislative Fact Sheet – Trust Code. (Enacted: Alabama, Arizona, Arkansas, Colorado, District of Columbia, Florida, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Vermont, Virginia, West Virginia, Wisconsin, and Wyoming. Proposed: Connecticut and Illinois). Last visited September 26, 2018.
15 ACTEC Commentaries MRPC 1.2.
16 Unif. Trust Code § 703(a).
17 Unif. Prob. Code § 3-717.