Trust Planning: The Role of Successor Fiduciary

As medical advances extend human life expectancy, the likelihood that an individual will become incapacitated before dying increases. To protect our families, friends and others it is important to be able to recognize when an individual becomes incapacitated and to understand the obligations and power of a successor trustee, agent under a power of attorney or other fiduciary role  (trust planning).

Trust Planning: Agents – Fiduciaries – Trustees

Today’s estate plans typically include a revocable trust, pour-over will, durable power of attorney for financial matters and durable power of attorney for health care. These documents nominate agents and trustees to act in the event that the grantor or principal cannot.

What Are The Duties Of A Trustee?

There are three sources of authority for the trustee. The trust document, state statute and state case law. Generally, a trustee must:

  • Preserve and protect the estate assets (including investing);
  • Exercise discretionary authority in a reasonable manner;
  • Act as a prudent investor;
  • Avoid conflicts of interest;
  • Impartially administer the trust for all current and remainder beneficiaries;
  • Collect all trust receipts; and
  • Maintain records of income, principal and expenditures.

What Are The Duties Of An Agent Under A Power Of Attorney?

As with the duties of a trustee, the responsibilities of an agent under a power of attorney are derived from the document and state law. These duties include the following:

  • Avoid conflicts that would impair the ability to act loyally for the principal’s best interests;
  • Act in good faith, with care, competence, and diligence;
  • Make decisions based upon the preferences of the principal and the authority granted in the document;
  • Keep the principal’s money and property separate from the agent’s property and avoid “co-mingling”;
  • Keep records including all receipts, documents, disbursements and significant actions to facilitate any required accountings to the principal and anyone else designated to receive an accounting; and
  • Preserve the principal’s estate plan (consider it when handling any joint accounts, life insurance, trusts, retirement accounts, or property specifically given to a named person in the principal’s will or trust).

Because an agent under a power of attorney is a fiduciary role, the responsibility carries with it a higher standard of care than if an individual was simply acting informally to assist another. This means family members and other heirs can hold the agent legally responsible for his or her actions.

When Does The Power Of Successor Become Effective?

Determining when the power of a successor becomes effective is sometimes difficult. Generally, the successor agent or trustee is empowered to act upon the “incapacity” or “disability” of the grantor/principal. In deciding whether an individual had capacity, one court wrote: “… old age, feebleness, forgetfulness, filthy personal habits, personal eccentricities, failure to recognize old friends or relatives, physical disability, absentmindedness, and mental confusion do not furnish grounds for holding that a [person] lacked mental capacity.”

What then is “incapacity?” A well drafted document will contain a definition, thus the first place to look is in the document. If not defined in the document, state statutes or case law is instructive.

Is A Person Who Is Named Required To Act?

A person named as trustee or agent in a document is not obliged to accept the responsibility and must commit an act evidencing that he or she has accepted. This would include signing the trust document or by signing a separate declaration of acceptance or by knowingly exercising the powers of a trustee or agent.

If the trustee does not explicitly accept or does not exercise trustee powers within a reasonable period of time, the individual is deemed to have rejected the trusteeship. In these cases the named individual does not become trustee. After accepting trusteeship, the trustee may only resign according to the terms of the trust, with the consent of all beneficiaries or by following the state statute.

Is A Trustee Or Agent Entitled To Compensation?

As with the duties that govern the job of trustee or agent under a power of attorney, whether such person is entitled to compensation is governed by the document and the law. If there is a provision in the document it will be determinative. Some documents restrict who gets paid (such as expecting children to act without compensation, but allowing a third party or institution to be paid) or limit the fees to a specific dollar amount. Many documents allow the payment of fees based on services rendered. If the document is silent, most states provide for “reasonable” compensation.

Conclusion

Often the job as a trustee or agent is a thankless and tedious one and may be fraught with liability. But, having the power to manage the affairs of a family member/friend without court interference and the associated cost is a desired option for most families. The key is that each individual must understand when his or her responsibility begins, and what it includes before accepting the role as agent or trustee.

If you have questions about Trust Planning, contact us. Apex Financial Advisors are ready to help.