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What is a fiduciary and why are they important in estate planning?

by Christine Schafer | Contributor
April 18, 2020

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A fiduciary, who acts on your behalf and manages your assets in various roles during your lifetime and after your death, is held to high standards and faces significant responsibilities. The selection of your successor trustee, power of attorney and personal representative – all of whom have a fiduciary duty -- requires great care and consideration.

Choosing the right individual to act as your fiduciary may be one of the most important decisions made during the estate planning process. Your fiduciary will be the individual tasked with managing your assets should you become incapacitated or unable to manage your own affairs. This individual will also be responsible for administering your estate after your death.

A fiduciary is charged with the legal and ethical responsibility to act with a high standard of care and act in good faith, trust and confidence.

Some of the particular fiduciary roles in estate planning we will look at include:

  • The successor trustee
  • The agent acting under a power of attorney
  • The personal representative of an estate (also known as the executor of an estate)

During your initial attorney-client consultation, you will want to be honest with your attorney so that they are able to create the most effective fiduciary provisions that are tailored to your specific goals. Now, let’s take a closer look at the duties of owed under each of the previously mentioned roles.

The successor trustee

When you choose to create a trust as part of your estate plan, you are typically what is called the initial trustee. Your role as initial trustee of your trust simply means you have full control over the trust assets and likely the ability to modify the terms of your trust. The successor trustee is the individual or trust company that will take control over the management of trust assets after you are no longer able to serve.

When will my successor trustee have authority to act?

Should you face a time of temporary or permanent incapacity, your successor trustee will be in charge of managing the assets in your trust on your behalf. After your death, the successor trustee must then administer your trust. This means that the successor trustee must distribute the remaining trust assets to the beneficiaries listed in the trust agreement, similar to an executor under a will but without the cost of the burden of probate administration.

Who should be my successor trustee?

Initially, you may be tempted to choose a family member to act as the successor trustee. While this is permissible, you want to take great care in choosing the right individual. Some factors to consider include:

  • U.S. citizenship (a requirement for the successor trustee role)
  • No history of felony convictions (a felony conviction may disqualify them)
  • Over the age of 18 years old
  • Mature and financially responsible
  • Local (if they are in the same state, it will make the process much easier)
  • Someone you trust

You can list more than one successor trustee, and in most cases it’s recommended. That way, if your top choice for successor trustee is sick or has predeceased you, you will already have an additional successor lined up. Keep in mind that although your successor trustee will have the option of seeking assistance from other professionals, such as CPAs, lawyers and investment professionals, they still have a great responsibility as your fiduciary. It’s important for a successor trustee to understand the potential liability they face if they fail to act prudently and with great care while managing or distributing your estate or trust assets.

The agent acting under a power of attorney

The person you choose to act as your agent under a power of attorney becomes a representative of your finances. This is a powerful document since, once executed, you are authorizing your agent to access investment accounts, banking accounts, retirement accounts, digital accounts and more. Like the successor trustee, the agent must also act as a fiduciary to the principal (the principal is you, the creator of the document). This means that the agent you choose must make all decisions in good faith and with the best interests of the principal in mind. Any agent who is found to abuse their power will be held liable for their actions.

The power of attorney

There are different types of power of attorney documents that can be drafted, depending on your specific needs. these may include:

  • Durable power of attorney
  • General power of attorney
  • Specific power of attorney

The most popular of the three and used most frequently in estate planning is the durable power of attorney. The agent’s role under a durable power of attorney become effective as soon as the principal executes the document. This means that the principal does not have to be incapacitated for the agent to act on their behalf. While the ability to act immediately on behalf of the principal allows for flexibility and immediate benefits, it also may cause you to feel uncomfortable. It’s important to note that an attorney can tailor this document to your needs, which includes restricting the authority given to the agent.

The personal representative

The personal representative (or executor of your estate) is the individual named in your last will and testament. This person is responsible for administering your estate, which may include:

  • Filing the will with the probate court
  • Gathering estate assets and opening an estate account which will hold these assets until the end of court proceedings
  • Selling estate assets to pay creditors of the estate
  • Filing tax returns
  • Distributing estate assets to the beneficiaries in accordance with the terms of the will

The personal representative as a fiduciary of your estate must act in the best interest of the estate and beneficiaries. Failing to do so may result in litigation and personal liability.

Being in control of your affairs and assets during your life is important to you and knowing who will manage those affairs and assets when you’re gone (and how they will manage them) is just as important. Your fiduciary will be responsible for acting on your behalf and may do so in a number of roles, as we discussed. They may able to assist with paying your bills if you’re not feeling well, they may be able to sell your home if you need liquidity for assisted living facilities, they may be in charge of managing assets you leave behind for young beneficiaries or administering your estate after your death. Whichever role they may fill, it’s clear it will be an important one so take great care in choosing the right individuals in your estate plan.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial planners and retirement income certified professionals can assist you in maximizing your retirement resources and help you to achieve your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling 888-864-2542 today.

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