When you set out to build an estate plan, your first inclination is usually to think about how you will divide your assets between your heirs and beneficiaries. However, there’s another consideration that can be just as important: who is going to be responsible for managing your assets when you’re no longer able to do so yourself?
You might choose a child to serve as successor trustee, a trusted friend to administer your estate, or an attorney to advise you through the process. Each of these roles involves a significant degree of trust and carries a significant legal responsibility.
That is where the concept of a fiduciary comes in.
Fiduciary is one of those words that you often hear and think you know, but its meaning is more nuanced than it first appears. That’s because the role and duties of a fiduciary depend on the specific situation and relationship between the fiduciary and the person whose interests they’ve been entrusted to represent.
In the context of estate planning, probate, and trust administration, a fiduciary is someone who has been entrusted with significant responsibility to act on behalf of another person, trust, estate, or group of beneficiaries. That can include several different fiduciary relationships, including those between a trustee and beneficiaries, a personal representative and an estate, and an attorney and client.
Understanding these different fiduciary relationships can help you better understand the responsibilities that come with giving someone legal authority, and the protections available when those responsibilities aren’t met.
What is a Fiduciary?
In estate planning and administration, a fiduciary is someone who is entrusted with the responsibility of managing property or acting on behalf of another person, trust, estate, or group of beneficiaries. While that person is given authority to manage finances, properties, and assets, they aren’t allowed to act in their own interests.
The level of fiduciary responsibility depends on the relationship, but in nearly all cases, a fiduciary is expected to act with loyalty, honesty, and care. That means avoiding conflicts of interest, protecting property they are entrusted with, and following the intent of the trust or estate documents.
In many cases, fiduciary duties also include a responsibility to provide information or an accounting of an estate or trust to its beneficiaries.
Who Is a Fiduciary in Estate Planning and Administration?
Who will serve as a fiduciary and what responsibilities they have is typically determined by the estate planning documents and the legal relationship involved.
Trustee
A trustee is the fiduciary responsible for managing trust property and carrying out the terms of the trust. In a revocable living trust, a successor trustee takes over when the initial trustee passes away or can no longer serve. This person is often a family member or close friend, but they can also be a professional fiduciary or financial institution.
A trustee’s main responsibility is the management of assets and distributions to beneficiaries. However, the trustee cannot simply do whatever they want. They have a fiduciary duty to follow the terms of the trust and applicable law.
In some cases, the trustee may also be a beneficiary, such as when the trustee is a child of the grantor. Even though they stand to inherit some assets, that does not give them permission to do whatever they want or treat all trust assets as their own.
Personal Representative
In probate, the personal representative is the fiduciary responsible for administering the estate. When a will names an executor, that person is appointed as the estate’s fiduciary. If there is no will, the court may appoint an administrator.
As fiduciary, a personal representative is responsible for collecting estate assets, paying the estate’s outstanding debts and taxes, dealing with creditors, and managing and selling property when authorized or necessary.
The executor or administrator is also responsible for distributing the remaining assets in accordance with the will and applicable law.
Attorney and Client
While the fiduciary responsibilities of a trustee or personal representative are fairly straightforward, it’s common to wonder “is an attorney a fiduciary?”
Yes, under California law, the attorney-client relationship is considered a fiduciary relationship. California’s Rules of Professional Conduct impose specific duties around competence, diligence, confidentiality, communication, and conflicts of interest.
While a lawyer does owe a fiduciary duty to a client, that does not mean that the lawyer has the same fiduciary responsibility as a trustee or personal representative in a trust or probate estate. They are separate and distinct roles. Serving as a client’s attorney does not make that person their trustee or personal representative.
What Does Fiduciary Duty Look Like in Practice?
To understand what a fiduciary’s responsibilities look like in estate planning, consider a common situation:
A mother of three creates a trust and names her eldest daughter as the successor trustee. When the mother eventually passes away, her daughter becomes responsible for managing the trust assets, which include the family home, bank accounts, investments and other properties. Her daughter will act as the fiduciary managing those assets until they are distributed according to the trust terms.
As trustee, the daughter does not own those assets, and she cannot do whatever she wants with them. Her fiduciary duty is to administer the trust responsibly and in line with the trust document. That means keeping the trust assets separate from her personal property and accounts, keeping accurate records, paying legitimate expenses, such as debts and taxes, and providing required information to her siblings and any other beneficiaries named. She also has the responsibility of making distributions as dictated by the trust and applicable law.
However, if the daughter is also a beneficiary of the trust, that can complicate her fiduciary duties. Let’s say there is a disagreement between her and her siblings about what to do with the family home, which was placed in the trust. The trustee wants to keep the property and inhabit it, while her siblings want to sell it and split the proceeds between them.
Whether the home must be sold depends on the specific terms of the trust, the trustee’s authority under the trust, and applicable law.
If the mother gave the trustee the discretion to retain or sell the property, the siblings may not be able to simply “out vote” her or override her decision to keep the house.
Likewise, the trustee cannot abuse her position to act exclusively in her own interests. If she wants to retain the property for herself, the situation can raise legitimate concerns about self-dealing and conflicts of interest. If her sibling beneficiaries believe she is failing to meet her fiduciary duties, then they may be able to raise a legal challenge to the administration of the trust.
This scenario illustrates how complicated a fiduciary role can become, and why it’s important to understand the nature of the fiduciary relationship: a fiduciary is given authority to act, but they are still accountable for how they use their power.
What Happens When a Fiduciary Fails to Meet Their Duties?
When a fiduciary fails to meet their legal responsibilities, it can be considered a breach of their fiduciary duty.
In the context of a trust or estate, a breach of fiduciary duty could take many forms: a trustee using trust assets for personal expenses, an executor selling an estate property to a friend at a discounted rate, or improperly favoring one beneficiary over another.
However, not every disagreement between fiduciary and beneficiaries means there has been a breach of fiduciary duty. Beneficiaries can disagree with a trustee’s decision without the trustee having acted inappropriately. The key question is whether the fiduciary acted consistently with the governing documents, applicable law, and the duties they were assigned.
When personal interests conflict with the interests of the trust beneficiaries, it can mean it’s time to seek legal advice. Depending on the circumstances, beneficiaries may be able to request an accounting, ask a court to review the fiduciary’s actions, or pursue other legal remedies available under California law.
If you find yourself in a situation where there is concern around a trustee, personal representative, or even a lawyer’s fiduciary duty to their client, consider working with an estate planning attorney to help you understand your rights and the estate documents.
Choosing the Right Fiduciary
If you’re in the process of creating an estate plan, choosing the right person to act as a fiduciary is one of the most important decisions you can make. The person you choose isn’t just a name on a document. You are granting them significant power over your property, money, and records, as well as entrusting them to make distributions and potentially complicated decisions that can affect your family after you’re gone.
Before making a decision on who to choose as your fiduciary, you should consider practical questions: is this person responsible? Are they organized? Are they financially capable? Are they even willing to accept the responsibility? And perhaps most importantly, can you rely on them to handle potential family conflicts?
Whether it’s a surviving spouse, adult child, or sibling, many people turn to a family member to fill this role because of the implicit level of trust that comes with family. However, sometimes there is not a family member available who can accept the responsibility.
Under those circumstances, it may make sense to consider a professional fiduciary, rather than asking a family member or friend to take on the role.
How an Estate Planning Attorney Can Help
Fiduciary responsibilities can become complicated, especially when a trust involves significant assets, multiple beneficiaries, and potential conflicts of interest. An estate planning attorney can help you understand those responsibilities and make informed decisions during the administration process.
For someone creating their estate plan, this may include choosing the right trustee or personal representative, while drafting documents that clearly establish their responsibilities and authority.
An attorney can also guide trustees and personal representatives through administration, interpret trust terms, and assist beneficiaries who have concerns about how a fiduciary is managing the estate or trust.
Whether you find yourself with questions about choosing a fiduciary to manage your trust or estate, concerns about your own responsibilities as a fiduciary, or concerns about a fiduciary’s conduct, consider working with an estate planning attorney like the Law Office of Vidhya Babu.
Our extensive experience guiding families in San Mateo and the Bay Area through estate planning, probate, and trust administration can help you understand your rights and options.
Contact the Law Office of Vidhya Babu today for an initial consultation.