Basic definition – A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other asset for another person.
When doing Wills or handling Estates, we are often talking about fiduciaries. A person who is named as Executor of an Estate, or who is appointed as Administrator of an Estate (in a no-will situation) is a fiduciary. What does this mean? Why is understanding this so important?
I usually explain it this way – “A fiduciary has a higher level of responsibility than an individual. They are responsible to look out for the interests of everyone who has an interest in the thing they are the fiduciary for. If there is a conflict between an individual’s interest and their responsibility as a fiduciary, they must exercise extreme caution and make sure they fulfill their fiduciary responsibility before looking out for their individual interests.”
Very often a person named as Executor in a Will (who will therefore become a fiduciary) is also a beneficiary. Is there an inherent conflict of interest in this? YES, but this is not a prohibition against doing it, it is simply something to heed at all times and to work through carefully.
On the surface, we can see that if a Will names one child of four as Executor, and splits the Estate equally among the four, the Executor should divide the Estate equally and not make their own share higher, or pay their share earlier than the others. That’s easy.
But there are often others the Executor/fiduciary has obligations to, like creditors and tax authorities. What happens if the Estate owes taxes, or if a creditor claim arises within the permitted time? Let’s add the fact that the Executor has marshaled the assets and wants to do right by the other beneficiaries, so he pays them their full shares. Lo and behold, a timely creditor claim against the Estate pops up but the Estate funds have already been paid out to the beneficiaries. Guess what? The fiduciary can be held personally responsible for breaching their fiduciary responsibility!
Being a fiduciary can often be a difficult and stressful job. In New York an Executor or Administrator is entitled to be paid a fee for their work. The fees (called “commissions”) are roughly 5% of the first $100,000, 4% of the next $200,000, 3% of the next $700,000, and so on. It can add up to some money, but most would tell you, they EARNED IT. I have to agree.
A few observations about fiduciaries….
- Selecting an Executor via a Will is a VERY important decision. Sometimes even more important than naming beneficiaries. Naming successor Executors in a Will is also very important. These people will be fiduciaries, so make sure they are up to it.
- When an Estate is being handled well, usually it’s because the fiduciary understands their responsibility. When an Estate is not being handled well, or when someone has an issue with the way things are being handled, a “breach of fiduciary responsibility” is generally at the core of any claims.
- In an Estate Administration (no Will), when people are fighting over who should be appointed fiduciary, they either don’t understand the fiduciaries’ role, or they are fearful that the others don’t. I have seen this scenario MANY times.
- The best ways for fiduciaries to avoid problems are to have clear and transparent communications with the interested parties and to keep great records. Other than outright stealing, nothing will put a fiduciary in a worse position than secretiveness and lack of communication. I counsel client fiduciaries to be pro-active in communicating with the other interested parties. I can’t say they always follow my advice, but I KNOW it is the right advice.
I may have given a few practical reasons to do things right, but there is a bigger reason. If someone named you as Executor, it’s because they TRUSTED YOU. As difficult as the fiduciary role can be, it is an “honor bestowed”. That alone ought to be enough for a person behave as a fiduciary should.
If you are that person, remember that. If you are making a Will, choose someone who will get that!