Fiduciaries - Module 4 of 5

MODULE 4: Fiduciaries

A fiduciary is a person (or a business, like a bank) who has the obligation to act for another under circumstances which require trust, good faith and honesty. The most common estate-related fiduciaries are the executor, the trustee, the guardian for minor children and the attorney for the estate.[1] Fiduciaries are held to a higher standard of conduct and trust than an average person and are expected to avoid conflicts of interest and acts of self-dealing (in which the fiduciary puts his interests above the rights of the persons relying on him).

Executor or Personal Representative

The executor has primary fiduciary responsibility for the estate of a deceased person.[2] Jurisdictions generally use the terms “executor”[3] or “personal representative,”[4] often interchangeably,[5] to refer to an individual or corporate fiduciary who handles the administration of an estate. In addition, some states may use the term “administrator” for an “intestate” estate (which means an estate where there is no will or nobody is appointed by the will). Although the terms are genderless, some states or jurisdictions will use different terms for female fiduciaries, including “executrix” or “administratrix.”

In her will, a testator can appoint an executor to administer the estate, along with an alternate in the event the initial person is unable or is unqualified to serve. Reasons for an executor to fail to serve may include disability or death, residency in an area not near the assets or heirs, inconvenience or failure to meet other requirements of law. Occasionally, an appointed executor will be required to manage property located in a state other than the state of residency, and a person residing in that state may then be appointed by the court to manage that property.[6]

In most cases, the executor named in the decedent's will is appointed if she is qualified under the law,[7] as a qualified executor named in the will is given priority. Still, states do set forth requirements for administrators. For example, in Florida, to be eligible and qualified to serve as a personal representative, the nominated person must be a competent adult, not be a convicted felon and be mentally and physically able to perform tasks required of a personal representative.[8] It also requires her to be a Florida resident[9] unless she’s a relative of the testator or the spouse of a qualified person.[10]

Generally, “the person with priority as determined by a probated will including a person nominated by a power conferred in a will” has the first priority for appointment as personal representative, unless disqualified to serve.[11] A court may have little or “no discretionary power to refuse to issue letters to the named executor unless he is a minor, an incompetent, or otherwise disqualified.”[12]

The decision to appoint single or multiple executors in a will, or to appoint corporate personal representatives, depends upon the complexity of the estate, the assets involved, the potential for claims and litigation, and the nature of the work involved. The executor, as a fiduciary, should be familiar with, or capable of hiring professionals to handle, significant estate administration issues including taxation, accounting, financial, legal and investment issues.[13]

If a person dies intestate, or if a person dies testate but his will doesn’t appoint representatives who are qualified and able to serve, then state law specifies the appropriate appointments as executor.[14] Priority is usually given to certain heirs or other interested parties. For example, priority may be given first to a spouse, then children, grandchildren, parents or siblings, with more remote relations given priority if no closer relatives are able to serve.[15]

Some states allow non-relatives to serve in an intestate estate. In Texas, for example, priority may be granted to the surviving spouse, then to relatives based on order of descent and then to a creditor. After that, any person of good character residing in the county of residence or any other person who is not disqualified may be appointed as executor.[16] Creditors may, for example, want to probate an estate to be able to access its funds, and so if nobody else wants to bring a probate proceeding for a small or insolvent estate, the creditor may be allowed to do so. 

Duties of the Representative

Once qualified and appointed by a court, an executor may be required to post a bond. The bond provides monetary protection against the possibility of fraud or embezzlement, ensuring that the estate is managed fairly and competently. A will may include a statement exempting the personal representative from posting bond, and a court may also waive the bond by order or agreement of the parties.[17] However, the posting of bond remains within the court’s discretion, and a probate court may require the posting of bond even where the bond has been waived by the will or the parties.[18]

As a fiduciary, an executor has responsibilities to fairly administer the estate for the benefit of the estate’s interested parties. He must gather, manage and protect the estate’s assets, seek out and validate the claims of creditors and dispose of the remainder of the estate in accordance with the will or applicable rules of intestacy. These responsibilities are often delineated by statutes that provide details with respect to the executor’s fiduciary responsibilities.[19] Other responsibilities may include:

1. Taking custody of, storing, and insuring assets appropriately;

2. Making claims and bringing suits for wrongful death;

3. Re-titling assets and perfecting title;

4. Collecting moneys or other property due to the decedent’s estate;

5. Filing claims for benefits, including social security or veteran’s benefits and insurance claims.

6. Notifying creditors as required by federal or state law, reviewing claims and filing necessary objections; and

7. Accepting service of process and defending suits against the estate.

In addition, the executor is responsible for communicating with beneficiaries, interested parties, and with the court in a timely manner. He is authorized to retain the services of professionals, including accountants, attorneys and financial advisors, maintain estate records and file any required accountings or tax returns, and close the estate. Executors are responsible for providing the court with an inventory of assets (and appraised values), a list of creditors’ claims, whether paid or objected to, and filing an accounting of receipts, payments and distributions.[20]

Unless the will states otherwise, executors are entitled to compensation for the services they render to the estate. These fees may be established by agreement with the decedent, by will provision or by state law. If fees have not been established in any of these ways, the executor is entitled to reasonable compensation. Any compensation paid is subject to review by the court for fairness to the beneficiaries.[21]

Executors may resign their appointed positions with court approval.[22] If an executor is allowed to resign, the alternate executor named in the will may be appointed as the successor.  

Executors are required to exercise their responsibilities without conflict of interest or self-dealing. An executor who violates his responsibilities may be removed by a court and can be sued by the estate and its beneficiaries for damages.[23] An executor’s bond may be used to offset any damages an estate suffers due to his negligent or wrongful acts.

Trustees

Where a personal representative is primarily responsible for the administration of an estate (and all that administration entails), a trustee is primarily responsible for the management of trust property. A trustee is an individual, bank or trust company that holds legal title to property for the benefit of another and acts according to the terms of the trust. A trustee is a fiduciary like an executor and is legally held to the same high level of responsibility for actions taken in managing the trust and its assets.[24]

Trustees may be named in a will that sets up a “testamentary” trust, which is any trust established by a will. Testamentary trusts may be established for a variety of reasons. Marital trusts, for example, may be used to support a spouse while reducing or eliminating estate tax.[25] Special needs trusts can be used to supplement the income of beneficiaries who are disabled and who may receive government benefits.[26] Minors’ trusts are usually set up by parents or relatives who want to leave property to young beneficiaries, but also want to name a trusted adult to care for the property until the child is old enough to be financially responsible.[27]

Testamentary trusts are established and funded under the auspices of the probate court, which oversees the appointment of the trustee named in the document and the transfer of assets to the trust.[28] Whether a testamentary trust is subject to ongoing review by the court is a matter of state law. In some states, the court may retain jurisdiction to oversee the trustee until the trust terminates,[29] while in other states, trusts are not subject to ongoing review by courts[30] except in specific situations.[31]  

Trustees of testamentary trusts are required to be of age and have the capacity to contract under the law of the state where the trust will be administered, usually the state of residence of the testator. In a state that requires ongoing supervision by a court, the trustee may be required to qualify, post bond and account for his management of the trust annually.[32] In states where the court does not retain jurisdiction, the trustee will not be required to qualify, post bond or account, unless the will requires ongoing review.[33]  

The considerations in appointing a trustee are similar to those in appointing an executor. A trustee can be an individual, group of people or corporate entity. Often, testators choose close family members as trustees, such as a spouse, child or sibling. Like executors, trustees can be named in the will in the order of priority, with primary trustees named, along with alternates in the event a trustee is unable or unwilling to serve.  

If an absence in the office of trustee occurs, state statues may address further appointments. Otherwise, the probate court has the discretion to appoint a successor. In cases where the statute addresses priority, those with some connection to the trust will often have priority or be able to choose successors. In Wisconsin, for example, a successor trustee named in the document has first priority in the event of a vacancy, followed by “a person appointed by unanimous agreement of the qualified beneficiaries,” or, if that fails, then “a person appointed by the court.”[34]

As with executors, trustees have broad powers and responsibilities over the trust and the management of its assets. Trustees may exercise all powers and responsibilities written in the will without court approval unless contrary to the law of the state where the trust is to be administered.[35] In addition, state statutes will often list specific powers and responsibilities the trustee may exercise, if not contrary to the will. These powers and responsibilities are similar to those of executors, and may include:

1.    Collecting trust property and accepting or rejecting additions to trust property;

2.    Acquiring, selling, or exchanging property;

3.    Depositing, borrowing, or investing money;

4.    Continuing to operate a business or other enterprise and take any action that may be taken by shareholders, members, or property owners;

5.    Constructing, developing, repairing, leasing, or selling real property;

6.    Insuring the property of the trust against damage or loss;

7.    Investigating, preventing, abating, or remedying violations of environmental law;

8.    Paying, contesting, settling, or releasing a claim by or against the trust;

9.    Paying taxes, assessments, and compensation of the trustee and of employees and agents; and

10. Appointing or removing a trustee to manage property held in another jurisdiction.

The executor has duties specifically related to administering the estate while a trustee has responsibilities related to the trust. Among these may be payment of distributions to a beneficiary who is under a legal disability, whether directly to the beneficiary, to the beneficiary’s guardian, or for the beneficiary's benefit, and allocating receipts and disbursements between income and principal and distributing income and principal in accordance with the trust agreement.[36] 

As fiduciaries, trustees are required to avoid engaging in acts of self-dealing and to avoid conflicts of interest. Trustees who violate their fiduciary duties may be removed by the terms of the will or by a court of law. In addition, trustees may be held liable for negligent or wrongful actions taken while serving as trustee.[37] A trustee’s bond can help offset damages to the trust or beneficiaries.  

Trustees may resign in accordance with the will, without court approval, so long as the trust is not under continuous review by the court. If the trust is under court supervision, a trustee may only resign with court approval.[38]

Guardians for Minor Children

In her will, a testator may name a guardian to take legal custody of, and care for, minor children in the event of the testator’s death. Because a biological parent has legal guardianship of a minor child unless terminated by the court, the naming of a guardian presumes both biological parents are deceased or otherwise unable to care for their children. In the event that a guardian is not named in a will, the court will appoint a guardian. Often, family members petition for guardianship; those family members will be considered in choosing a legal guardian for the child until the child reaches the age of majority.  

Note that the designation of guardian in the will, while usually respected by courts, is not binding. Family courts have broad discretion to act in the “best interests of the child” in virtually any matter. If the court believes that the named guardian will not serve the best interests of the child, the court may disregard the guardianship instructions in the will (though this rarely happens).

In any matter before the court, including an estate administration or appointment of legal guardian, a court may appoint a “guardian ad litem” to represent the child’s interests.[39] The guardian ad litem does not have custody of the child, but is responsible for representing the child’s best interests in the financial matters relevant to an estate proceeding. Guardian ad litems may come from the general pool of estate planning attorneys who practice before the court and are typically appointed when there is a minor child of the deceased or a minor who is a substantial will or trust beneficiary.

In determining the custody of a child, in addition to considering the guardianship appointment in the will, if any, the court may consider any reports or recommendations of the guardian ad litem, along with other relevant factors including:

(1) The ability of the prospective guardian to meet the physical, emotional, moral and educational needs of the minor on a continuing day-to-day basis.

(2) The minor's wishes if he or she is over the age of 12 or is of sufficient maturity to form an intelligent preference.

(3) The existence or nonexistence of an established relationship between the minor and the prospective guardian.

(4) The best interests of the minor.

A guardian of a minor has the powers and responsibilities of a custodial parent regarding the ward's support, care and education. A guardian is not personally liable for the ward's expenses and is not liable to third persons by reason of the relationship for acts of the ward.[40]

Although in some states an appointed guardian is fully responsible for the well-being of the child and his assets,[41] in other states there are two types of guardianship for minor children: guardianship of the person and guardianship of the property (also referred to as the child’s estate).[42]

Guardians of minor children are considered fiduciaries in much the same way as executors and trustees.

Guardians are responsible for the care and preservation of assets belonging to the minor, which may have been received by inheritance, gift or settlement of a wrongful death or personal injury lawsuit.[43] A guardian should immediately take possession of all of the minor’s assets and take all measures necessary to safeguard them.[44] As a fiduciary, a guardian may be held personally liable for any losses that are incurred when the assets are not properly safeguarded.[45] Guardians responsible for a minor’s assets may be required to account for those assets annually.[46]

Guardians may also be required to post bond, to ensure the safety of the minor’s assets.[47] They also may be required to file guardianship plans with the court.[48]

In our last module, we’ll conduct a more thorough examination of testamentary trusts and their purposes.