by Jonathan A. Nelson
Estate planning has serious and weighty implications – the entire field has developed in recognition that everyone dies (and everyone does so with some unfinished business) and that even during life, people need others to step in during emergencies. Because of these realities, it is expedient, and often necessary, to entrust to someone else - a ‘fiduciary’ - with the care of these matters. That person is also a fallible human, however, and so regardless of whether they perform this role well or poorly, it is the principal or his beneficiary (and not the fiduciary) who is most affected.
In recognition of this shift of risk, the law has developed the idea of ‘fiduciary duties’. These represent the standards to which a fiduciary is held when managing and applying the assets of another, and accordingly also the degree to which that fiduciary will have to make the principal’s beneficiary whole in the event that duty is not followed. What are these ‘fiduciary duties,’ and what do they look like?
1. The Duty of Loyalty. Loyalty in this context looks at whether the fiduciary is serving the interests of the principal (or beneficiary). The Virginia power of attorney statutes codify one test as, “Does the action follow the principal’s reasonable expectations, if known, and his or her best interests if not?” There are times that the fiduciary may also benefit, but a reviewing court will look dimly on self-serving actions which are not meaningfully and proportionally benefitting the person to whom this duty is owed.
2. The Duty to Take a Reasonable Fee. While in many ways a subset of the duty of loyalty, this is a frequent flier on the abuse list. “Reasonableness” is based on the actual service provided, not the rate of the fiduciary when doing other tasks. One local law firm found themselves in some hot water a few years ago for excessive fees in serving an incapacitated adult, including hourly billing of about $6,000 to sell a car for $4,000.
3. The Duty of Impartiality. A fiduciary cannot play favorites between beneficiaries, especially when the fiduciary is one of the beneficiaries. This can include distributing stocks which are performing at different rates, distributing assets with different capital gains tax basis, or giving the memorable but not particularly valuable tangibles to one beneficiary and the junk to the others. This can become difficult where the beneficiaries are in different classes, such as weighing investment options where a lifetime beneficiary receives income and remainder beneficiaries may receive the value of unrealized growth.
4. The Duty of Prudence. A fiduciary owes a duty to exercise care over the entrusted assets, and the standard is generally formulated “as great a care as an ordinary person shows for own assets.” In practice, that translates to a bit more cautious an investment approach than some ordinary people would take, and the standard can vary based on the choice of fiduciary – a family member may not be held responsible for a low return on investment while an investment company serving as fiduciary may be examined much more closely for whether their investments are performing at the market level; similarly, an attorney may be held responsible for legal mistakes that a family member might not.
5. The Duty to Inform. A fiduciary has to provide to beneficiaries sufficient information to understand and defend their interests. Some specific information is required by statutes, but generally speaking, while the fiduciary doesn’t need further permission of the beneficiaries to administer the assets, he does need to let them know what he has done.
Some elements of these duties can be waived in the estate planning documents, but sometimes it is better to require a little extra in order to reduce friction or safeguard against foreseeable problems. For an attorney drafting estate planning documents, it can be tricky to build a plan that balances the burden placed on a fiduciary with the anticipated benefit. In the administration and litigation sides, more than in most areas of law, the presence of these duties allows the serious big-picture question of “Are you doing what is right?”
Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.
The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.