We represent many persons who act in the trusted role of “fiduciary,” as successor trustee of a trust, executor of a will, administrator of an estate (when a person dies without a will) or other role. Fiduciaries often have a tough and thankless job. They must marshal assets, file tax returns and distribute property according to the will, trust and applicable laws. Fiduciaries who fail to work closely with a trusted advisor can make mistakes. Here’s a look at the most common ones:
Paying bills too soon. Fiduciaries often see bills arrive in the mail and decide to pay them right away to avoid any problems. But this can actually create problems.
There’s an order in which bills must be paid: Items such as taxes, funeral expenses and the costs of estate administration typically take priority over credit card statements, for instance. If an estate turns out to have a lot of debts (perhaps the person who passed away had an unexpected tax bill), and the fiduciary has paid off low-priority debts first, there might not be enough money to pay the high-priority debts, and the fiduciary might be personally liable for them.
It’s best not to pay low-priority debts until the estate administration has been completed, or at least until the fiduciary knows all tax and administration liabilities.
Paying heirs too soon. Often, beneficiaries are impatient to receive their inheritance and pressure the fiduciary to start making distributions. A fiduciary can get into trouble if he or she makes distributions quickly and it later turns out there aren’t enough remaining assets to pay debts.
A related issue is that a fiduciary has an obligation to secure and properly value assets. If beneficiaries are using “self-help” to make off with personal property (e.g., vehicles, artworks, furniture, the piano) before the fiduciary can have them appraised, the fiduciary could be liable.
It’s an even bigger problem if a family member takes an asset that the will or trust says should go to someone else.
Handling real estate. If real estate is going to be sold, deciding how quickly to do so can pose a minefield for fiduciary. Sometimes a fiduciary can be caught in the middle between one heir who’s living in a house and another who wants it liquidated quickly. And sometimes it’s hard to sell a property unless certain repairs or improvements are made first – but it’s not always clear whether the executor has the authority to use estate funds to make the improvements.
Another issue arises if a property sits empty for a long time. If a house isn’t occupied, it may be hard to obtain insurance for it, and it may become subject to maintenance problems, burglary and vandalism.
Investing estate and trust assets. If an estate or trust will take a long time to settle, fiduciaries may be tempted to invest some of the estate assets. That might be okay if the investments are extremely safe, but a fiduciary could be on the hook if an investment loses money and an heir inherits less as a result.
It’s important to remember that while fiduciaries have an obligation to conserve assets, they have no legal duty to take unreasonable chances try to grow the assets.
Of course, the opposite problem can come up if trust or estate assets are already invested in risky things. In that case, a fiduciary must decide whether to leave them there or move them into safer investment vehicles.