What is a Fiduciary Duty and how does it apply to Trustees and Executors*?
A fiduciary duty is an obligation to act in the best interest of another party. A Trustee has a fiduciary duty to the beneficiaries of a Trust to hold and protect the assets for their eventual benefit. An Executor of a Probate Administration has the same duties but must also report to the court, as legally required and instructed.
What is the Standard of Care that a Trustee or an Executor Must Use?
In managing a trust or an estate, the trustee or executor must use at least ordinary business care. This means that they have to do what a prudent person would normally do given the circumstances of the decisions. If they have special skills such as a law or accounting degree, they can be held to a higher standard of care. The standard of care is judged in light of the circumstances existing at the time transactions occur. Often a trustee or an executor may not have familiarity with the task at hand and they are well-served getting advice from someone in the particular field, whether it be in real estate, accounting, investing or with legal decisions. If a trustee or an executor overreaches their knowledge or authority, they may be held liable for any loss or damage to the trust or estate.
What Powers does a Trustee or an Executor have?
The trust document or will typically lays out the powers and limitations on a trustee or an executor. If the document does not address a particular situation, then the California Probate rule and case law govern the permitted actions of the trustee or executor.
Testamentary instruments generally contain two types of provisions: “dispositive provisions” that govern the distribution of property, and “administrative provisions” that govern the powers and the duties of the trustee or executor including, but not limited to, payment of taxes and expenses, interpreting the trust instrument, and other procedural issues. The bulk of a trust is made up of these administrative provisions.
General Duties of a Person Administering an Estate or a Trust
Basic duties involve the collection, management, and investment of assets, payment of expenses, taxes and other obligations, and keeping a record of the transactions and a duty to account.
Three fundamental principles while administering an estate are that the Trustee or the Executor 1) must be faithful to the intent of the deceased; 2) must carry out the terms of the document; and 3) must treat the beneficiaries with fairness and impartially.
How do the Beneficiaries Stay Informed?
A trustee or an executor has a basic duty to keep the beneficiaries reasonably informed. At a minimum, they must notify the decedent’s beneficiaries and heirs of the existence of the Trust or Will. Each beneficiary or heir has a right to request a copy of the trust agreement or will and is entitled to ongoing information regarding the administration. At TrustParency PC, we believe that transparent communication among Trustees/Executors and beneficiaries is helpful and reduces conflicts. We encourage communication on a regular basis and keeping all parties informed by sending the required notices and periodic updates to all interested parties.
What can a Trustee or an Executor do to Protect Themselves from Liability?
A trustee or an executor must never commingle their own personal property with the decedent’s’ assets or use the decedent’s property for their own personal gain or profit. A trustee or an executor may not engage in any transactions that will result in a conflict of interest between their personal interests and the interest of the estate. In fact, when conflicted with such a choice, the trustee or executor must put the beneficiaries’ and heirs’ interests ahead of their own or be possibly subject to penalty.
A trustee or an executor or may not fully delegate their actual duties to others. They can, however, hire experts to help them make decisions. Hiring attorneys, accountants, investment advisors, and others to consult concerning administration of the trust or probate is appropriate and the estate may pay for such advisors. Hiring professionals can also assuage the beneficiaries that the fiduciary is making sound decisions with valuable input.
What is the Duty to Invest?
A trustee or an executor has a duty to make prudent and reasonable investments. At death, most assets (excluding pre tax assets like retirement accounts) that are includable in the estate of the decedent get a step up in basis to “date of death value”. This means that the stocks and real estate that would have incurred a capital gains tax if sold prior to the decedents passing can be liquidated with little or no tax consequence. This gives the estate a chance to diversify its holdings and create liquidity. Regardless, the assets should be invested with the least risk of loss possible and have a reasonable rate of return until distributed.
Not all assets must be sold, but it is important to get appraisals and establish the new values for future transactions and for reporting the value of the gifts to the various beneficiaries. We have names of numerous certified appraisers to assist with these requirements.
Generally, there is a statutory protection when treating one asset differently than the others, particularly if that particular asset has a special relationship to the estate or a beneficiary, such as a closely held business or a family residence that the family would like to maintain. The chosen course of action is evaluated in the context of the “portfolio as a whole and as part of an overall investment strategy having risk and return objectives reasonably suited to the trust/estate.” A trustee or an executor who invests and manages assets must comply with the “prudent investor rule.” The Act does not shield a trustee or executor from liability for making unsound investments or failing to exercise the power of investment in the best interests to the estate.
A trustee or an executor may employ a financial advisor but the fiduciary must exercise prudence in the selection of an agent. This often includes interviewing more than one advisor and being able to articulate how that person was chosen. Delegation of this responsibility does not avoid all responsibility thus, a trustee must continue to take an active role in oversight and evaluation of the agent’s actions. Any questions about the propriety of any investment should be brought to the attention of counsel before making or continuing the investment.
How Does a Trustee or an Executor Keep Track of the Financial Transactions?
This may be one of the most important parts of serving as a fiduciary as good record keeping can avoid most conflicts.
California law requires that all beneficiaries receive certain information upon request and an accounting upon demand. A trustee generally has an affirmative duty to give a full accounting of all trust transactions not less often than annually or at the termination of the Trust, to all beneficiaries who are entitled to distributions of income or principal.
We at TrustParency PC believe that when everyone is aware of the financial dealings, there is less suspicion and all parties feel more empowered. We provide templates to help fiduciaries keep track of income and expenses and we have resources to share to complete full accountings when appropriate.
What is Necessary for Ongoing Trust Accounting?
Wills and Trusts often provide for ongoing trusts whether it be for a minor, a spouse, or a beneficiary who may not manage money well. If a trustee or an executor will continue to administer one or more continuing trusts after the termination of the administration period, it will be necessary to keep track of principal and income as it pertains to investments and distributions. Each trust will require its own Tax ID and an annual tax return, which most likely will need to be prepared by an accounting professional.
How Does a Trustee or an Executor Get Paid?
This is the one place where the rules governing a Trust and a Will differ greatly. If someone is administering a will through probate, the fees are set by statute. If someone is administering a Trust, and the fees are not specifically mentioned in the trust, the California Probate Code provides that the trustee is entitled to compensation that is reasonable under the circumstances. Most trust instruments—the vast majority—are either silent on the subject of compensation or, at most, state that the trustee is entitled to reasonable compensation. That can vary based on factors such as location, expertise of the trustee and complexity of administering the trust.
Compensation in either case is considered taxable income. Often a remainder beneficiary who is also the fiduciary may forego taxable compensation and take the gift without being taxed on it as income.
Confidentiality
Attorney-Client privilege only exists between the attorney and the “Office of Trustee”. If, for some reason, the Trustee is removed or resigns, all communications may be turned over to the Successor Trustee. Only communications that are personal in nature, as opposed to administrative in terms of the trust, may be protected under certain circumstances.
We have found that Trustees who are willing to take advice from advisors, such as CPAs, attorneys and financial advisors, and communicate clearly with beneficiaries as to the actions they take, can avoid most conflicts. When a Trustee is removed, it usually has to do with lack of communication and not following advice of counsel.
*For these purposes, Executors includes Administrators and Personal Representatives and is the person executing a will or appointed by the court when there is no trust.