10 Best Practices for Fiduciaries
By Stacey L. Worthy, Esq.
Here is the scenario: a couple of years ago, your friend executed a power of attorney. He informed you that he appointed you as his attorney-in-fact. He has just been diagnosed with a serious illness impacting his ability to comprehend simple things. What does this mean for you and what steps must you now take?
This is a common scenario when loved ones execute documents such as powers of attorney, advanced medical directives, living trusts, and living wills. These documents are created so that a loved one (the “Principal”) can appoint a trusted individual, whether it be an attorney-in-fact, trustee, conservator, guardian, or agent (the “Fiduciary”), to take over the Principal’s financial or health-related affairs if the Principal becomes incapacitated.
- Get a Special Tax ID Number. If you are managing a trust or estate, IRS laws require a new Tax ID number because the estate is considered a different “person” from the Principal. The IRS will walk you through this simple process on its website: https://sa2.www4.irs.gov/modiein/individual/index.jsp.
- Keep Funds in Separate Accounts. If you have been authorized to handle the Principal’s finances, open a special account at the bank for fiduciary funds. Do not deposit any fiduciary money into your personal account or use fiduciary money to pay your personal bills. Doing so is called “comingling” and can result in liability.
- Don’t Pay Debts or Distribute Funds Too Quickly or Too Slowly. If the estate does not have enough money, you can be held personally responsible if you overpaid creditors. This includes funeral bills. State laws dictate who is entitled to what payment and when they may receive such payment. Consult an attorney if you think the estate may not contain enough funds to cover all outstanding debts. Beneficiaries may want their money as soon as possible, but based on state law, you may not be required to distribute such funds for a year or more. If you give money to someone too early, and something happens in which you need the money back, you are personally and legally responsible for it.
- Carefully Detail All Money. Keep a record of all funds that come in or go out. For each item, write down the “when,” “who,” “what/why,” and “how much.” For example, if you receive a $35 check from an insurance company, write down the date you received it (when), the name of the insurance company (who), the reason for the payment, such as payment on medical treatment or refund on premium (what/why), and $35 (how much). Photocopy all checks before depositing them at the bank.
- Keep Records. Create an electronic spreadsheet or keep a notebook in which you record everything that you do to handle the Principal’s estate—who you talk to, what was said, what was done, when, etc. Also keep an accurate checkbook register every time money comes in or goes out. Every financial transaction should be recorded in both the checkbook register and your own electronic or paper record.
- Obtain Receipts. A receipt will allow you to prove to the court that you gave property to someone and the worth of such property.
- Save Check Images & Bank Statements. Many states require you to file with the court an “accounting,” which is a detailed statement of everything that you received and paid. In order to prepare a complete and accurate accounting, you should keep all bank records and images of cancelled checks as proof of payment. Doing so will allow you to prove that a third party actually received the funds that you said you paid because most courts accept check images as legal proof of payment. If your bank will not provide images, go to a different bank.
- Ask Questions. There are strict and detailed rules for handling someone else’s money. Find a lawyer experienced in this area and use him as a resource. Asking a question is a lot cheaper than making a mistake.
- Meet Deadlines, Use The Proper Forms. Many courts have due dates by which accountings must be submitted. Sometimes deadlines must be met every few months. You will have to pay a penalty personally if you submit your accounting late. Additionally, if a court requires you to use its forms and report formats when you submit the accountings, make sure you do so. Otherwise, the court may reject your accounting, causing you to do the work again and potentially miss a deadline.
- Manage Taxes. You are responsible for filing all tax returns and paying all taxes on time. If you are not sure what to do, consult an accountant.
If you are appointed as a Fiduciary and have questions, please contact DCBA Law at firstname.lastname@example.org or 202-644-8525.