The term “Fiduciary” defines anyone who acts on behalf of another. The simplest fiduciary is an “agent,” often appointed under a Power of Attorney. But other agents are appointed by court (guardians, conservators, administrators, and personal representatives) or by written agreement (health care proxies and trustees). Since one purpose of estate and long-term care planning is to select appropriate fiduciaries, we are frequently asked to help families choose appropriate fiduciaries. Some considerations (honesty and responsibility) are required of ALL fiduciaries but other attributes depend upon the specific role the fiduciary will play.
Fiduciaries Are Vital to Planning
One purpose of estate and long-term care planning is to determine exactly who will serve as your fiduciaries:
- If you have not previously executed a Durable Power of Attorney and a Health Care Proxy, a medical crisis may require a probate court judge to appoint a Guardian and/or Conservator to manage your affairs. Such an appointment will delay services, pressure relatives, expose your affairs to public scrutiny, and cost a great deal of money. If you haven’t signed such documents in the past five years, or if your situation has changed, you should act NOW.
- Parents who fail to nominate a guardian for their minor children risk having someone they don’t trust or don’t know being named by a court to raise their children. A simple statement in a Will can avoid that.
- To probate an estate without a valid Will, a court must appoint an “administrator,” often an attorney, entitled to compensation.
- If you want to leave assets to someone who, because of age or otherwise, cannot manage them, you may want to create a Trust not only to manage the assets, but to invest them, and distribute them in a prudent manner.
The choice is yours. Either undertake legal planning and execute critical documents to appoint your own fiduciaries or leave those decisions to a court.
Types of Fiduciaries – Responsibilities and Criteria
The law isn’t terribly selective about who may serve as fiduciaries. A legally competent person (over 18 years of age and capable of managing his or her affairs) and some state-regulated banks may serve as Agents, Trustees, or Personal Representatives. Any adult (except for unrelated treating physicians and former spouses) can serve as Health Care Proxies. To choose the most appropriate fiduciary, we recommend that you distinguish the particular functions entrusted to each type of fiduciary.
Health Care Proxy. The Agent appointed under a Health Care Proxy should be readily available in the case of an emergency. (We specify the Agent’s telephone numbers in the Health Care Proxies we draft to facilitate contact.) The Agent should be able to discuss your condition with your physician. Knowledge of medicine may be useful, but more important are whether your nominees’ views on medical treatment coincide with your own, whether they can ask penetrating questions of physicians, and whether they can make difficult decisions under great pressure. An Agent named under a Health Care Proxy has no responsibility over the Principal’s money and, therefore, has no obligation to inventory or account for the Principal’s assets.
Durable Power of Attorney. An Agent appointed by a Durable Power of Attorney may, at some time in your life, manage your financial affairs. Your Agent should be very trustworthy, diligent in reviewing and paying bills, organized to keep track of invoices and investments, experienced in financial matters, and, over all, sensitive to your material needs. Your Agent should, ideally, live nearby and be financially independent and, therefore, free from temptation. If your Durable Power of Attorney empowers the Agent to make gifts to family members or sell assets, be certain that the person you choose is fair and impartial. While Agents under Durable Powers of Attorney are usually not required to issue formal accountings, no one should accept such a responsibility without (1) segregating such funds from his or her own assets, (2) planning to file tax returns on behalf of his or her Principal, and (3) keeping good records which, if required, can be converted to formal accountings.
Trustee. In creating a Trust, the degree of discretion you grant to the trustee may depend upon whom you choose as trustee and successor trustee. Trustees have “inherent” authority to invest and sell trust assets and may, if you so specify, enjoy considerable latitude in distributing income and/or assets to beneficiaries. If any of these discretions are broad, pick trustees whose judgment and impartiality are impeccable. If you are not very confident about their judgment and impartiality, you may want to restrict their discretion or, possibly, you may want to choose a professional trustee, for example, a corporation established to serve as a trustee, an attorney, accountant, or bank as trustee or, in some cases, as a co-trustee. Trustees are usually required to provide all beneficiaries with annual accountings which reveal their investment decisions, expenses, and distributions. Trustees are personally liable for negligence.
Trustees for Special Needs Trusts. Special Needs Trusts provide supplementary support to individuals who are disabled. Carefully drafted and administered, they can continue the principal beneficiary’s rights to public benefits such as SSI, Medicaid, and subsidized housing and even allow a parent to fund a trust without risking later disqualification for his or her own MassHealth benefits. In order to avoid disqualifying the donor and the beneficiary from public benefits, the trust cannot pay for the food or shelter because SSI benefits are supposed to cover such expenses. We often recommend co-trustees to manage such trusts, one, a family member if possible, to determine specific distributions and the other, a lawyer or someone else experienced with such trusts, to assure compliance with complicated tax and public benefits requirements.
Personal Representatives: Previously referred to as an Executor. The Personal Representative is responsible for the administration of your estate (presenting Will for Probate), including creating an inventory of your assets, notifying your beneficiaries, and distributing your assets according to your wishes. A good Personal Representative doesn’t have to be an expert on probate, need not be a tax scholar, and almost never exercises sophisticated financial knowledge — because, one hopes, your estate will be quickly probated and distributed. Unless your Will states otherwise, Personal Representatives are required to obtain surety bonds to protect beneficiaries from the Personal Representative’s negligence. The critical attribute of a successful Personal Representative is the ability to choose and hire an appropriate attorney who will probate your estate efficiently.
Do’s and Don’ts When Selecting A Fiduciary
There are some criteria you shouldn’t apply in selecting a fiduciary.
- Don’t torture yourself about whether, by naming one relative rather than another, you will hurt someone’s feelings. If you’re compelled to explain your choices (and you shouldn’t be) simply tell those you choose not to name that you didn’t want to burden them with the responsibility but you do appreciate their concern.
- Don’t discriminate in your choices on the basis of gender or age. Relying on the eldest son has no more relevance to the selection of a fiduciary than it should to choosing princes — as the British royal family example demonstrates. Gender and age don’t guarantee either competence or loyalty.
- Don’t restrict your choices to close relatives. If none of your children is presently appropriate, consider other people to perform some of the tasks.
- Don’t name co-fiduciaries to serve simultaneously unless your affairs are very complicated or the Trust (such as a SNT) would function best with a division of labor. The advantages of dual appointments (contrasting talents and a “check” on an impulsive fiduciary) are usually outweighed by delays or impasses in decision-making. We usually counsel clients not to name Co-Agents, Co-Proxies, or Co-Personal Representatives.
- Don’t select a fiduciary whose interests may conflict with your own or with the interests of beneficiaries you name in an instrument.
On a more positive vein, the basic criteria you should apply can be boiled down to the ABCs, Availability, Background, Confidence, and Successor.
- Select a fiduciary who is likely to be available when his or her powers are to be exercised. The person should be young enough that she is likely to be around when you need her and willing to shoulder the burdens incumbent on the particular office for which she has been named.
- Select a person with the background to function as a fiduciary. In addition to being responsible and mature, any person you choose should understand the role he is to perform and appreciate your needs and desires. You may want your attorney to discuss your expectations with such candidates.
- Name a fiduciary in whom you have the utmost confidence. Honesty and loyalty are qualities which cannot be compromised in choosing a fiduciary. The ideal fiduciary has other attributes: personal organization, ability to deal effectively with lawyers and accountants, and general intelligence. Experience as a fiduciary may be valuable but is rarely required.
- If at all possible, select at least one successor fiduciary for each position to replace the first person you named should that person become unavailable
Finally, by recognizing the very different roles fiduciaries play you may be able to match each role’s particular characteristics with individuals in your own life who most inspire your confidence.
This article is offered for informational purposes only and should not be construed as legal advice.
In drafting your estate documents we will take into consideration your particular circumstances and preferences and base our analysis on your needs and the current law.
Before executing any documents, you should seek advice from our office or another qualified attorney. Changes in the law and your personal circumstances may significantly alter the strategies recommended.
