July 7, 2017

A farmer had a draft horse to sell and a man from a nearby town was interested. “There’s just two things wrong with that horse”, the farmer told his prospect. “I’ll tell you one now, and one if you buy the horse.” The prospect agreed and asked what the first thing was. “You can’t catch that horse”, the farmer said. “When you want him to work, you’ll spend all morning chasing him.” The prospect thought that was all right, he’d just stable the horse the night before. He paid his cash and asked what the horse’s second fault was, and the answer soon came: “He ain’t worth a damn when you do catch him!”

The Yankee reputation for sharp dealing is fairly earned – I’ve had to watch it even with a few clients – but there’s nothing legally wrong with what the farmer did. Unless, of course, the farmer was the buyer’s fiduciary.

A fiduciary is a person who owes to another the duties of good faith and trust. The resulting duty is highest legal duty of one party to another, with the fiduciary bound to act in the other’s best interests. So if the farmer were the fiduciary of the horse buyer – if, say, the farmer was selling the horse for a probate estate and the buyer was an heir – the farmer would have had a duty to tell the prospective buyer that the horse was worthless. The ordinary, sharp elbowed rules of commerce do not apply between the fiduciary and the one to whom he owes a fiduciary duty.

I am a fiduciary for my clients. A bank trust officer is a fiduciary for his or her trustees. And the thing is this: You just might be a fiduciary too, if you are the personal representative (PR) of a probate estate, or the conservator or guardian of a child or disabled person, or even if you are just looking after the affairs of an elderly parent, or disabled person, or child.

For example, suppose you befriend an elderly neighbor, and as the neighbor’s health begins to fail you undertake financial decisions for the neighbor, sign checks for him and so on. Maybe you have power of attorney. You have very likely become the neighbor’s fiduciary, with a fiduciary duty to that person. Same result if you are caring for an elderly parent in a similar manner, or looking after a child’s inherited money. The thing to remember is that it does not take a probate estate or a guardianship order from a court to create the fiduciary duty: Any “confidential relationship”, with one person trusting another to look after him, may be deemed by a court to have created a fiduciary relationship.

It’s been my experience in probate litigation that many persons who find themselves to be fiduciaries fail to understand their position, and that leads to trouble. I’ll list a few of the characteristics of the fiduciary duty.

The first is the duty of loyalty. If you are a Personal Representative (executor) or other fiduciary, your decisions must be governed not by any hint of self-interest, but solely by a duty of loyalty. Suppose you are PR to an estate and you are also an heir. If there is a division of personal property to be done by drawing lots, you can’t just decide you go first. If there is money in a trust and you need to decide how to invest it, you can’t decide to lend it to your own business. Basically, a fiduciary cannot use the position to further his or her own interests: “Self-dealing” is a bad violation of the fiduciary duty.

The duty of prudence comes next. Although this duty certainly applies to bank trust officers, it also applies to PR’s, conservators and anyone else charged with looking after another person’s money. If you are investing, you have an obligation to inform yourself thoroughly of any investment before putting money into it, and basically being very careful with that money. The result is generally conservative investments.

Fiduciaries have the duty of full disclosure. This one trips people up all the time but it can work to the fiduciary’s advantage. A fiduciary can’t hide anything from the persons to whom he or she owes the duty. Suppose you are a PR and the estate owns a camp needing a new roof. Your wife’s nephew could use the work and you want to give him the job. That might be OK, but only if you fully disclose the proposal to the heirs before awarding the contract: price, relationship, everything.

The disclosure obligation is actually useful in forcing compliance to the fiduciary duty, especially for a layperson. To use the PR example again, if you consistently and frequently report to the heirs as to the administration of the estate, in email or other writing, the obligation to fully disclose will keep you on the straight and narrow path. You are unlikely to self-deal or invest imprudently if you are frequently, truthfully and regularly reporting to the heirs. And if you do stray slightly, the fact of prior disclosure may just keep you from trouble.

Among the fiduciary duties is the duty not to comingle money, not to mix up your money with the money entrusted to you. I have seen quite a few estates where the PR didn’t even understand that the estate must have its own bank account, entirely separate from the PR’s personal funds! If you are a PR please set up a separate account, and call it the “Estate” or “Fiduciary” account, and while you’re at it order red checks, so you’ll be reminded it’s fiduciary money you are dealing with.

One final note: Shareholders in closely held corporations owe each other the fiduciary duty. All the duties described above apply, a fact that is often overlooked.

Stay out of trouble.

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