Most clients understand that the executor of an estate or trustee of a trust has a fiduciary duty to the beneficiaries of the estate or trust. This means, in general, that the executor or trustee is accountable to the beneficiaries to act only as directed by the Will or Trust, and the executor or trustee cannot seek to benefit himself at the expense of the beneficiaries. What seems to be less well understood, and what is increasingly causing litigation, is that an agent (or attorney in fact) acting under a Power of Attorney is also a fiduciary, and therefore, is held to the same standard as an executor or trustee.
Understanding Your Duties as Attorney in Fact
Problems often arise because the agent fails to maintain accurate and complete records as required by New Jersey law. This failure may stem from a general misconception that the laws governing attorneys in fact are somehow less formal than those governing executors or trustees. In addition, executors and trustees are often represented by counsel who can advise and assist with record keeping, while it is less common for attorneys in fact to retain counsel. Failure to maintain books and records may also result from the fact that while executors and trustees have more defined roles and often act within more defined time periods, an attorney in fact may act only sporadically. Regardless of the reason, it is important to remember that the principal of the Power of Attorney, the principal’s guardian, or after the principal has passed, the personal representative or a beneficiary of the principal’s estate, may ask a court to compel the attorney in fact to account for all actions they have taken under the Power of Attorney. Then it becomes the burden of the attorney in fact to demonstrate that every expenditure was permitted by the Power of Attorney and was solely for the benefit of the principal.
This should not dissuade a well-meaning friend or family member from agreeing to serve as agent under a Power of Attorney. A few common-sense precautions can go a long way in warding off future claims from suspicious beneficiaries.
Three Practical Compliance Tips
- First, be precise with your record keeping. Maintain (and back up) everything electronically. For example, if you purchase groceries for the principal, using or reimbursing yourself with the principal’s funds, take a picture of the receipt, which will show that each item purchased was for the principal. This will help to avoid the situation where, after the principal is deceased, a family member questions the legitimacy of the purchase. If that question is raised, it is much better if the attorney in fact can rely on a receipt showing the date and amount of the purchase, with every item listed, rather than having to hope that a court will not fault him or her for failing to recall that particular purchase.
- Second, never use the principal’s funds for yourself. To take the grocery shopping example: do not pick up one or two items for yourself while shopping for the principal, with the principal’s money. This can be frustrating, as it may mean you must make multiple trips to the store or bring someone along with you to purchase your items just for you. But, it will enable you to state with full confidence that you never used the principal’s funds for yourself – instead of saying that you never did so, except for a few small items, occasionally. Even if you made a very limited exception to the rule of not using the principal’s funds, the fact that the exception exists at all will open the door to stricter scrutiny from beneficiaries and, potentially, courts. Inevitably, this stricter scrutiny leads to higher legal costs.
- Finally, if you compensate yourself for serving as attorney in fact, make sure that the amount of your compensation complies with the terms of the Power of Attorney. If the document is silent regarding compensation, New Jersey law provides that a court can award “reasonable” compensation. In that event, it may be worthwhile to consult with counsel as to what is reasonable under the circumstances.
If you have any questions about this post or any estate planning and administration matters, please feel free to contact one of our estate planning and administration attorneys.