NOVEMBER 17, 1997 VOLUME 5, NUMBER 20
When a Trustee or Conservator handles the money (or property) of a beneficiary, questions sometimes arise about proper investments and expenditures. Individual circumstances vary, of course; some beneficiaries may have unusual needs, and some trust documents may permit or restrict certain types of actions. Nonetheless, some general rules about handling money for the benefit of another will apply in nearly all cases.
The legal term for a person who handles money for another is "fiduciary." Trustees and conservators are both fiduciaries, as are agents operating under a power of attorney and personal representatives (executors) of decedents' estates. All fiduciaries are held to very high standards of responsibility, and may be ordered to pay back money lost in poor investments or improper expenditures. In some cases, breach of the fiduciary duty may even lead to criminal conviction and incarceration.
To simplify the discussion, the term "fiduciary" as used here is intended to include agents, conservators, trustees and personal representatives. The term "trust" is intended to include all types of estates, including conservatorships, probate estates and the assets of individuals managed through a power of attorney. Among the standards which every fiduciary must adhere to:
- The fiduciary must not "self-deal." In other words, the fiduciary may not lend herself money from the trust or estate, or profit in any other indirect way. This would preclude the fiduciary from selling her own property to the estate, even at what the fiduciary honestly believes to be a fair price, or from buying the estate's property, even at public sale or at an appraised price. Problems sometimes arise when the fiduciary enters into a transaction which would otherwise appear to be fair, but which indirectly benefits the fiduciary, as in purchasing property adjacent to the fiduciary's own property or accepting commissions from the sale of purchase of the estate's property.
- The investment strategy of the fiduciary must be appropriate to the nature of the estate and the circumstances of the beneficiary. It would ordinarily be inappropriate, for instance, for the fiduciary managing money for an ill elderly person to invest in speculative stock or illiquid assets. While there may be more flexibility in larger estates, fiduciaries in Arizona must follow the "Prudent Investor Rule." That Rule requires that the investment strategy of the fiduciary take into consideration the needs of the beneficiary, the availability of other resources, the prospect and likely effect of inflation, market trends financial probabilities, and the tax effect of proposed investments. The evaluation of the portfolio or proposed investment should be undertaken as a whole; that is, individual investments must be considered as part of a comprehensive investment plan.
- The fiduciary must account to the beneficiaries, and file all necessary tax and accounting information in a timely fashion. One of the effects of this rule is that when a fiduciary hires or pays household help, she must withhold taxes and pay insurance and estimated taxes as required by law. Of course, these rules apply to individuals as well, but are frequently ignored; a fiduciary does not have the luxury of choosing to take a chance on being found out, and must follow reporting requirements to the letter.
- A fiduciary must utilize any special skills she may have which relate to the operation of the trust. In other words, if a fiduciary is an accountant she will be expected to discharge her accounting duties more professionally.
- Fiduciary fees must be reasonable, and must be based on the actual amount of work performed for the estate. Ordinarily, those fees are calculated on an hourly basis, though percentage fees may be permissible in some circumstances.