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.
Keep beneficiaries reasonably informed. Washington has a multitude of statutes to ensure that beneficiaries receive reports regarding assets, income, expenses, liabilities and non-routine transactions. Although some of the specific statutory duties may be waived, the overarching obligation to communicate with the beneficiaries cannot be extinguished. Regular accountings may ensure that the fiduciary avoids inadvertent breach of this duty. First, regular accountings keep the fiduciary on track. Second, accountings provide a summary to review strategy and evaluate performance, helping the trustee to anticipate problems. Third, disclosure starts the statute of limitations as to a claim on the disclosed activity. It's important to ensure that accountings are accurate, presented in a formal manner, and that proof of delivery to the beneficiaries is retained.
Employ qualified professionals. Fiduciaries who employ qualified professional advisors for investments, sales, accountings, and tax returns gain several benefits. With a qualified professional, problems are less likely to occur and good records are kept. In addition, professional advice provides instant credibility to the reasonableness of the fiduciary's decision.
Fiduciary obligations cannot be taken lightly. However, establishing a good team and best practices for asset management and communication can set expectations and drastically reduce the likelihood of inadvertent breach, damages, and future liability.
[Teresa Byers is a lawyer with Garvey Schubert Barer in Seattle and a member of the Estate Planning Council of Seattle. Reach her at firstname.lastname@example.org.]