Fiduciaries Must Account, or else…

Fiduciaries Must Account, or else…

One of the most significant causes of action in the probate courts is a complaint against an individual for fiduciary abuse or neglect.  A fiduciary is an individual (or sometimes a corporate entity) entrusted to take care of another.  When someone serves as an executor, trustee, guardian, or agent under a Power of Attorney, they are known as a fiduciary.

By law, all fiduciaries must be able to account for their actions.  This duty is often ignored – either intentionally or from benign neglect.  In actions alleging abuse or neglect by a fiduciary, the individual who had been serving as an agent under a power of attorney or executor under a Will, for example, has failed to maintain proper records.  Many of these actions do not reveal fraud against the fiduciary. On the other hand, such costly litigation is often initiated and allowed to continue when a fiduciary’s accounting is nonexistent, untimely, or incomplete.

To avoid litigation, a fiduciary should prepare an account of his or her actions on a regular basis, at least annually. There are two types of accounting: formal and informal. An informal account is a written statement of the assets under the fiduciary’s management, which should include a list and source of the assets acquired by the fiduciary, and any income and expenses accrued. It should also note the sale or liquidation of any asset and the disposition of the proceeds of such sale or liquidation. A formal accounting incorporates all of these elements but also includes written substantiation of any assets accumulated and expenses undertaken.

When someone is appointed as a fiduciary, he or she should take the following steps:

First, all financial statements should be acquired and kept from the date of appointment until several years after the appointment has concluded.  Such financial statements should include not only bank statements and brokerage account statements, but also information regarding life insurance, annuities, and real property, among other items.

Second, a fiduciary must maintain a check register or ledger from the date of appointment until such appointment concludes. This register or ledger should be kept for several years thereafter due to statutes of limitations.

Third, checks or copies of checks should be kept. If a formal accounting is required, they will need to be produced to verify whom they were written. It is extremely advisable to refrain from writing checks to “cash,” as doing so can create a presumption that the “cash” was absconded by the fiduciary. Although it is frequently convenient to have cash on hand, it is more advisable to utilize a debit card for the account to minimize the need for cash. If cash is ultimately necessary, the fiduciary should acquire and retain receipts for all such expenditures.

Fourth, receipts should be maintained for all expenditures, not just cash expenditures. The receipts should clearly detail the payee, as well as the goods and/or services provided.

For many individuals, this standard of record-keeping exceeds what they do for their personal finances.  However, fiduciaries have a duty to protect and preserve assets for, among others, the beneficiaries of an estate. If these guidelines are not followed, the court can remove a fiduciary and charge them personally for any perceived discrepancy in the estate’s assets.

In all, it is imperative for fiduciaries to keep accurate records and be able to fully account for any action they take.