Much of our practice involves bringing claims against and defending lay fiduciaries. We find that they make common mistakes that often could have been avoided had they been more thoughtful and careful. Because fiduciary duties are the highest in law, namely, utmost loyalty and care, the liability consequences of carelessness can be big legal bills, settlements, and verdicts. Time and again, lay fiduciaries fail to understand their duties and later regret accepting and taking too casually their responsibilities. I outline below some tips for those considering becoming or are already serving as a fiduciary.
A fiduciary is someone who acts in trust for another such as an agent under a power of attorney (“POA”) or a trustee of a trust. Likewise, someone who orally or tacitly agrees to help manage another’s affairs for that person’s benefit is a fiduciary even though there is no document memorializing the relationship. The touchstone is whether one person has entrusted herself to the control and assistance of another with the reasonable expectation that the control and assistance will be exercised selflessly for her benefit. Most commonly, the relationship arises when a family member, often a parent, asks another, often a child, to serve as POA agent, trustee, or joint owner to provide assistance in old age. Transactions, especially gifts, that benefit the fiduciary are most likely to be contested by other family members in later litigation. The fact that the parent may have ostensibly handled the transaction on her own by signing the deed, check, or other instrument may carry little weight. Whether she had sufficient cognitive capacity to undertake, authorize, and/or ratify the transaction is often the central issue.
If you are asked to serve or are serving as a fiduciary, I offer these tips which hopefully can help you avoid needing to hire us to represent you in court:
- Understand The Governing Instrument. As a fiduciary you have only the powers and discretion granted in the governing document (the POA, trust, or other fiduciary instrument) and have a duty to abide by the document’s terms. You need to understand what it means, which may not be straightforward. For example: 1) the fact that a trust grants you as trustee a power to sell real estate does not mean that it is prudent or appropriate to do so – that will depend on the circumstances of the transaction and other trust provisions; and 2) the fact that a trust grants you the power and discretion to make distributions to a beneficiary likewise does not mean that it is appropriate to do so – in fact, if the beneficiary has sufficient independent resources, a distribution to him may be a breach of your duties. Talk with a lawyer to get guidance about the nature and extent of your duties, especially if you are about to engage in a transaction that other family members might question or in which you have some interest. Ignorance of the document’s terms is a liability setup.
- Family Dynamics Are A Key Predictor Of The Risk of Future Conflict. If you and your siblings don’t get along, you are at much greater risk of litigation over your handling of a parent’s finances. If you are the fiduciary for your spouse who has children from a prior marriage, you need to be extra careful as well. Children of prior marriage versus stepparent is an all too common dynamic in these cases.
- Always Segregate, Never Commingle Fiduciary Funds. Keep fiduciary funds segregated from your own. If you are acting as a fiduciary in multiple capacities, keep the funds and property corresponding to each fiduciary role segregated from the others.
- Maintain Meticulous Records. It is your responsibility and in your self-interest to maintain careful records so when a question is raised you can easily explain with documentation how fiduciary funds were used and why.
- In Court, You Will Have The Burden Of Proof And Will Lose If the Case Is A Tie. If family members challenge your handling of mom’s finances as having been inappropriately managed for your own benefit, you will have the burden of proof at trial. If you have followed the tips above and had a good understanding of your duties, segregated funds, and maintained meticulous records, this burden can likely be overcome. If you have not followed these tips, litigation will be a bumpy ride.
- Transparency Can Be A Wise Strategy. Before engaging in a transaction that might be later challenged by family members, tell them about it and get their input. If they object, a judgment can be made whether to proceed or to petition the Probate Court to bless the transaction in advance.
- Capacity Is Hard To Judge, Especially In Retrospect. Whether an aging parent had the capacity to undertake, authorize, and/or ratify transactions benefiting the fiduciary is often a critical focus of litigation. Judging whether someone is capacitated can be very difficult for laypeople and it often happens that multiple observers may reach different conclusions. If mom has some forgetfulness or dementia, be cautious about concluding she has the wherewithal to approve sensitive transactions. In later litigation, the court may hear from others, including other family members, her care providers, and expert witnesses, that she did not have sufficient capacity. If the litigation occurs after mom is known to have suffered a relentless decline of Alzheimer’s disease or other progressive dementia, the court may have difficulty assessing capacity at specific moments in the continuum of that decline.
- Your Emails, Texts, and Social Media Posts May Become Evidence. If your actions or service as fiduciary is contested in court, the other side will look for evidence that you are biased and cannot be trusted to manage the trust fairly and impartially. Don’t give them ammunition!
Fiduciary service should be undertaken with seriousness and care. For lay fiduciaries, there are many liability traps for the unwary. Hopefully, the tips above will help you avoid them.
(Note: Ralph Holmes is currently retired from McLane Middleton. For information on this or other probate litigation issues, please contact Alexandra Cote at email@example.com.)