The selection of a fiduciary requires a great deal of care and consideration on the part of an individual preparing their estate plan. The choice can be difficult, especially if there are a limited amount of possible candidates. In the end, the decision should turn on one question-who will protect the property and provide for the beneficiaries the best?
For a nominated fiduciary, how they were chosen is far less important than what they were chosen to do. Far too many fiduciaries are appointed or accept their nomination without fully understanding the duties that they will owe the beneficiaries of the estates and trusts they administer. These failures can cost an estate or trust thousands and even millions of dollars. They can also cause a fiduciary to be subject of an action in the Surrogate’s Court.
Understanding these duties is an important part of serving as a fiduciary. Amongst the duties owed by a fiduciary are:
- Duty to prudently invest-A fiduciary must ensure that the assets they are responsible for are invested in a prudent manner given their specific circumstances. Fiduciaries must prepare an investment strategy that matches the needs of the beneficiaries and gives due consideration to issues of risk, preservation of principal and production of income.
- Duty to distribute-In a last will and testament or in a trust, the specific distribution schemes are laid out. It is expected that a fiduciary will ensure that the property that they collect and administer is distributed in timely and regular payments to the beneficiaries. While there may be circumstances where a fiduciary is not allowed to distribute or where a distribution is not prudent, a failure to distribute that has no basis is likely to result in unhappy and potentially litigious beneficiaries.
- Duty of loyalty to the beneficiaries-A fiduciary is expected to act with greater care and concern towards his or her beneficiaries than a normal standard of care. In addition to having to be honest with the beneficiaries, a fiduciary is generally forbidden from self-dealing with the property they are administering. A fiduciary cannot compete with the trust or estate they are administering. When a fiduciary puts his or her interest above or in conflict with the trust or estate they administer, they are setting themselves up for potential litigation.
- Duty to exercise reasonable care and skill-A fiduciary is not required to have a background in finance, tax or law in order to qualify to serve. However, a fiduciary is expected to use reasonable care and skill to ensure that the property they are administering is not diminished because of their actions. A fiduciary can make reasonable mistakes, such as choosing an unsuccessful investment portfolio, but will expose themselves to litigation for failing to take the necessary steps to protect an estate or trust. Failing to collect assets, failing to file tax returns and other major mistakes should be avoided.
- Duty to account and inform beneficiaries-A fiduciary who fulfills his or her other duties to an estate or trust may still find themselves party to litigation if they do not properly account for their actions. Preparing a formal accounting can be time-consuming and expensive, but usually less cumbersome than litigation. By providing beneficiaries with periodic informal accountings and additional records upon request, a fiduciary can potentially shield themselves from liability
Abiding by his or her duties is not a guaranty that a fiduciary or estate litigation will not be commenced. If a fiduciary fulfills their duties, however, commencing and maintaining a successful litigation becomes much more difficult for the aggrieved beneficiaries.
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