Question: My dad is getting older and is having trouble managing his finances. Years ago he signed a power of attorney document naming me as his agent, so I could help him with these types of things. Not ever having done this before, what do I need to know about fiduciary duty?
Answer: Time and again, we meet lay fiduciaries caught unaware by the common pitfalls of administering an estate, a trust or another’s finances or health care under a power of attorney (POA).
“I’m not sure what to do.” “I didn’t know I was supposed to be doing that.” We frequently hear similar statements as much of our practice involves bringing claims against and defending lay fiduciaries. Fiduciary duties are the highest under the law, requiring the fiduciary to exercise the utmost loyalty and care. The most common pitfall for lay fiduciaries is failing to understand their duties and later taking too casually their responsibilities.
If you are asked to serve or are currently serving as a fiduciary, the following tips provide a few ways to avoid some common pitfalls:
Understand the governing instrument. As a fiduciary, you have a duty to abide by the terms of the governing instrument (POA, trust, etc.). And, your powers are limited to those granted in the governing document. It is not always appropriate or prudent to exercise a power, even if discretionary, granted in the governing instrument. For example, even though the trust grants you as trustee the power or discretion to make distributions to a beneficiary, if the beneficiary has sufficient independent resources, a distribution to him may be a breach of your duties. With respect to a POA, the document likely addresses your authority as agent to make “gifts” on the principal’s behalf. Importantly, the POA instrument dictates when the agency terminates, and in all cases, you cannot act under a POA once the principal dies.
Maintain meticulous records. Not only do you have a duty to keep adequate records, but it is also in your self-interest to do so. Good recordkeeping could help ward off potential litigation because you will be able to explain, with documentation, how fiduciary funds were used.
Transparency can be a wise strategy. Approach family members to discuss potential transactions before acting. If they object, you can then decide whether to proceed or petition the probate court to bless the transaction in advance.
Always segregate, never commingle fiduciary funds. Keep fiduciary funds segregated from your own. If you are a fiduciary in multiple capacities, keep the funds and property corresponding to each fiduciary role segregated from the others.
Fiduciary service should be undertaken with seriousness and care. For lay fiduciaries, there are many potential liability traps along the way. Contact an attorney to understand the nature and extent of your duties upfront.
Know the Law is a bi-weekly column sponsored by McLane Middleton, Professional Association. We invite your questions of business law. Questions and ideas for future columns should be addressed to: McLane Middleton, 900 Elm Street, Manchester, NH 03101 or emailed to knowthelaw@mclane.com. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.