Keeping Fiduciaries Out of Trouble
In Washington state, it's important to know your role as executor or trustee of an estate
While it may be an honor to be named as executor or trustee of an estate, those roles come with a myriad of responsibilities. Some activities, such as collecting assets, paying bills and filing tax returns, can be put in checklist form. However, both executors and trustees are fiduciaries, and as fiduciaries hold responsibilities and obligations beyond simple check-the-box tasks.
The fiduciary obligations owed to beneficiaries are found both in Washington statutes and in the common law. Thus, a fiduciary may breach an unwritten duty. Moreover, the burden rests upon the fiduciary to prove that a breach of a duty did not occur. Breach of a fiduciary duty can result in a lawsuit against the fiduciary and an award of damages from the fiduciary's individual assets. Damages may include, but are not limited to, return of any fees received by the fiduciary, the value of loss or damage to the estate or trust, and an award of attorneys fees and costs.
A brief summary of the important fiduciary duties is below, but a good rule of thumb is this: if it feels wrong to engage in a particular activity, it probably is.
Duty of good faith and loyalty. This is a fiduciary's core duty and it may not be waived. It requires the fiduciary to always put the beneficiaries' interests first. Subsumed within this duty are other fiduciary duties, including the duties to treat beneficiaries impartially, avoid conflicts of interest, and keep beneficiaries reasonably informed. So, follow the golden rule when acting as a fiduciary - do unto others as you would want them to do to you.
Treat beneficiaries impartially. When the fiduciary is also a beneficiary, or is related to one or more beneficiaries, this duty can be challenging. A fiduciary should not manage the trust or estate in such a way to disproportionately benefit himself or herself, or a favorite beneficiary. The duty extends beyond the obvious decision to distribute to one beneficiary and not another. More often fiduciaries run into trouble by allowing one beneficiary to use a trust or estate asset at no charge, or investing assets for long-term growth at the expense of short-term income, thereby benefitting later beneficiaries as the expense of current beneficiaries or vice versa.
Avoid conflicts of interest. The most obvious conflicts of interest arise in determining the fiduciary's fees. A fiduciary is entitled to be paid, but the method of payment should be specified in the controlling document or court approval sought. A less obvious conflict arises when a fiduciary offers to purchase a trust or estate asset, even at fair market value. Similarly, it would be problematic for the fiduciaries to employ themselves in another role, such a real estate agent, where they stand to benefit from the commission on the sale.
Note that when the fiduciary is also a beneficiary, it is often difficult to prove that he or she has not breached one of more of these duties. To avoid the appearance of conflicts or impartiality, when there is a decision to be made that could benefit the fiduciary-beneficiary, the fiduciary may elect to appoint a co-trustee or special trustee who can act as a neutral fiduciary for the particular transaction. Alternatively, the fiduciary may want to seek court approval of the proposed action.