Have you ever been asked to manage another person’s property and finances? Perhaps a family member named you as agent under a durable power of attorney, so that you can manage his finances if he becomes disabled. Maybe an elderly neighbor added your name to her bank accounts because physical limitations prevent her from leaving the house and she needs you to handle her banking. Helping a person in need is commendable, but you should understand the legal implications and risks before you accept and start to act.
If you agree to act as a formal or informal agent for the benefit of another person, you are likely serving as a fiduciary for that person (called the principal). A fiduciary relationship is characterized by the principal placing great trust, confidence and reliance in the fiduciary. It is often marked by an imbalance of power, because the principal may be disabled or weakened in some way. And the fiduciary relationship is abused when the agent acts for his own benefit, rather than the benefit of the principal.
Because of the unique nature of the fiduciary relationship, Michigan law imposes certain duties on those who serve as fiduciaries:
- A fiduciary has a duty to keep the principal’s property separate from the fiduciary’s property. This duty is violated when the fiduciary “co-mingles” the property in a common pot – such as depositing the principal’s pension checks in the fiduciary’s personal checking account.
- A fiduciary owes a duty of absolute loyalty to his principal, meaning that the fiduciary’s actions must be taken to promote and protect the interests of the person for whom the fiduciary is acting – and not the interests of the fiduciary. If you are entrusted with selling a parcel of land for the principal, you cannot sell the land to yourself for a low price and then re-sell it to a buyer for a high price. Under that scenario, you, as fiduciary, have violated the duty of loyalty by putting your own interests above the interests of your principal.
- A fiduciary owes a duty of care to his principal. If you are taking care of the principal’s unheated cottage but fail to winterize it, and the pipes freeze and burst as a result, that would violate the duty of care.
- A fiduciary owes a duty of good faith and honesty to his principal. A fiduciary has a duty to keep records showing how he administered the principal’s property and finances.
- A fiduciary also has a duty to follow the prudent investor rule, under which the principal’s portfolio of investments should generally be diversified.
Professional fiduciaries (such as trust departments at banks) are familiar with the governing legal principles. Laypeople serving in a fiduciary role are often unfamiliar with the concept and implications of fiduciary duty, which can create a perilous situation for the fiduciary.
Additional warnings to consider:
- A fiduciary is subject to fiduciary duties whether or not he actually knows about the rules; ignorance is no excuse.
- If a fiduciary violates one of these duties, and the violation causes financial harm to the principal, the fiduciary may be held liable for such financial harm – such as paying to replace all the pipes that burst in the un-winterized cottage. Such liability would be determined in a lawsuit brought by an interested person against the fiduciary.
- Some fiduciary duties run counter to the thinking of many laypeople. An adult child, who is managing dad’s finances because dad has dementia, might think: “This is dad’s money; dad always invested 100 percent of his assets in GM stock, so now that’s what I should do.” That would be wrong, because it is contrary to the prudent investor rule, which calls for portfolio diversification. That same adult child managing dad’s finances might think: “dad always tithed 10 percent of his income to the church, so I should continue that practice.” Such a decision may be improper if the underlying durable power of attorney does not grant the power to make gifts. Moreover, the practice of rigorous recordkeeping does not come naturally to many laypeople serving as fiduciaries.
- A violation of fiduciary duty may have criminal implications. Under Michigan law (MCL 750.145n.), it is a crime to financially exploit a vulnerable person. An adult child, serving as an agent for a mother who has dementia, may continue mom’s practice of gift-giving to himself and his siblings and then find himself accused of the crime of vulnerable adult abuse.
Too often, a layperson serving as a fiduciary consults an attorney only after he/she has been sued for violating a fiduciary duty. If you are managing another person’s property or finances, you should get legal advice on how to perform that role early, often and before any problems arise. The estate planning attorneys at Warner are prepared to help you.
