Trustees, Executors, and Administrators: The Duties of Fiduciaries

When someone dies, another individual will need to handle the affairs of the deceased individual. This person should organize the decedent’s assets and business interests and ensure proper distribution of the assets.[1]  If the probate court is overseeing the distribution of the assets and there is a will, this person will usually be called an “executor.” The executor is generally named in the decedent's will.  If there was no will, the estate is an “intestacy” estate, and the person is generally called an “administrator.”[2]  If the assets are administered as part of a trust, the person overseeing the administration is referred to as a “trustee.”[3] An umbrella term that covers all scenarios is “fiduciary.”[4]

This article first reviews the legal responsibilities of fiduciaries. It then provides a brief review of the consequences for failing to carry out those responsibilities and the impact of having multiple fiduciaries. All citations are to Iowa law. Although general legal principles are similar, other states have different applicable laws.

An individual managing the decedent’s affairs is called a fiduciary because they are “someone who is required to act for the benefit of another” as it relates to the assets. [5] Put another way, the person who is managing the necessary administration cannot act to better their own interest.[6]

The following subsections describe the general functions of a fiduciary once an individual has died. When they are performing any of the necessary functions, they must complete them in a way that ensures they are handled in the best interest of the decedent’s creditors and successors, while considering each beneficiary’s interest equally.[7]

Keeping The Right People Informed

Communicating to others is one of the most important things a fiduciary does. There are state laws that require fiduciaries to notify beneficiaries, spouses, creditors, and guardians of any minor children[8] about the trust or estate. [9] Sometimes there are additional people who must be notified, even if they are not named in the will.[10] The laws specify who must receive notice, how the notice must be distributed, and in what timeframe.[11]

During the administration of the trust or estate, the fiduciary needs to keep the beneficiaries informed.[12] Both a probated estate and trust have statutorily required communications that must be made to the beneficiaries, regardless of the will or trust terms.[13]

Collection, Management, and Distribution of Assets

The fiduciary must take possession and become responsible for the real property and personal property of the decedent shortly after the death of the individual.[14] If an individual or institution is being unduly difficult or is unjustifiably withholding information or assets, the executor or trustee can ask the court to compel testimony and order delivery of assets to the fiduciary.[15]

When it comes to the management of the assets, the fiduciary is under a duty to invest the assets in the same manner as a “prudent investor.”[16] Judge Cardozo put it best when he stated, “A trustee is held to something stricter than the morals of the market place.”[17] There are specific considerations that must be acknowledged and discussed. For example, a fiduciary should be aware of the expected tax consequences of any transaction or inaction,[18] the needs of the beneficiaries,[19] and the balance between liquidity needs and preservation of assets.[20]

It is important to note that if the assets were used as collateral for a loan or have a mortgage or lien upon them,[21] the statutory default in Iowa requires a court order authorizing the fiduciary to pay the debt or transfer the asset in satisfaction of the debt. [22] Most trusts or wills, however, include language granting fiduciaries the power to make many decisions and take many actions without court permission.

Thus, there is sometimes a disconnect between what is “typically done” and the statutory default. It does not help that the legal jargon within the document can make it difficult to fully grasp the powers of the fiduciary.  For this reason, fiduciaries should engage a trusted attorney to ensure that they are properly handling their responsibilities under the terms of the document and state law.

Finally, a fiduciary is charged with distributing assets and income in accordance with the terms of the trust or will.[23] If there is no will, then distribution is made according to the intestacy distribution scheme set by state law.[24] The fiduciary must have an “undivided loyalty” to all beneficiaries; this means they cannot favor one beneficiary over any other beneficiary.[25]

Hiring Professionals to Help

Many fiduciaries hire professionals to help manage the assets and keep the beneficiaries properly informed. When a fiduciary hires an individual to do work for the estate or trust, they are ultimately responsible for reviewing that individual’s performance and ensuring the task is completed competently.[26] The costs associated with getting this help can be charged to the trust or estate.[27]

Taxes

The fiduciary is responsible to ensure that the proper taxes have been paid.[28]At the federal taxation level, this includes the decedent’s final income tax return, any estate or trust income tax returns, and possibly an estate tax return. It also includes any state tax returns that must be filed, such as state income tax or inheritance tax.[29]  

Consequences

If an executor or trustee is not acting appropriately, the court can remove the individual from that position.[30] Iowa Courts, for example, have “wide latitude of discretion” on the matter but will only remove the trustee when best interests of the trust are not being served.[31]

A fiduciary will be personally liable for financial losses that occur due to the fiduciary not properly carrying out their responsibilities.[32]  For example, let’s assume an executor failed to discover real estate two counties over in a timely manner and missed one year of mortgage payments.  As a result of the mistake, there was an additional $4,500 owed to the bank under the terms of the loan agreement because of late penalties and additional compounding interest. In this scenario, the executor would likely owe the estate $4,500.

Other mistakes can also sometimes result in the fiduciary paying money out of their own pocket. For example, if a fiduciary fails to pay the debts owed to the federal government, they are personally liable to the extent they distributed property to anyone with a lower priority claim.[33] Likewise, trustees are personally liable to debtors if they distribute trust funds to beneficiaries “without making adequate provisions” to pay the debt.[34]

Multiple Trustees or Executors

When more than one person is named as an executor of an estate, they must usually agree as to all decisions or actions.[35] If there is more than one trustee, many states allow the “majority” of trustees to properly authorize an action.[36]

It is important for trustees and executors to understand what their co-trustee or co-executors are doing because all fiduciaries are liable, or legally responsible, for the actions of the others.[37] If co-fiduciaries cannot agree on what should be done, the court will determine the correct course of action.[38]   There is one very specific exception to these rules: A trustee may be able evade personal liability for the consequences of an authorized action if the dissenting trustee informs the other trustees in writing of the dissent before the action is taken.[39]