Introduction to the Term “Being a Fiduciary”
Whether you are an executor, trustee, estate administrator, or beneficiary, the law is demanding of a fiduciary so it’s important you understand what this means.
What exactly does the term “fiduciary” mean? Is it a fancy legal term with little significance or a mega term with major consequences? The answer is it’s a big word with a big legal meaning.
A fiduciary is a person(s) or an entity (i.e., bank, trust company, etc.) to whom is entrusted property and power for the benefit of another(s). It is a position of trust, confidence and responsibility. Being a fiduciary is challenging when only one person or entity has been appointed, but when two (2) or more persons or entities are appointed to serve as co-fiduciaries, the potential for complication and disagreement(s) increases significantly. Because there is little direction (or discussion) out there for an individual fiduciary to read (large corporate and trust company trustee(s) have legal advisors and lots of in-house training and education), I thought I would address the subject of serving as a fiduciary for your better understanding.
First and Foremost, a Fiduciary Must Preserve and Protect the Property of the Estate and/or Trust
Unless a controlling document or a court order directs otherwise, a personal representative/fiduciary has the legal right and the duty to take immediate possession and control of Estate property.
Tangible personal property (i.e., clothing, jewelry, household & personal items, etc.) can be given to the beneficiary entitled to receive this property unless the personal representative concludes he or she needs to take possession of it for purposes of administrating the Trust or Estate. Under N.J.S.A. § 3B:10-29 the personal representative must demand the return of property in the possession of an ineligible person in possession. If the targeted person ignores the request and subsequent legal action is taken against this person in possession, any loss or damage to the property falls upon the defiant. This notice to the possessor is very important if more than one person claims ownership of the property (i.e., mom’s jewelry, dad’s shotgun, etc.), believe me when I tell you that competing demands for possession of personal property take place in court more times than I can count.
While in charge of the Estate or Trust, the fiduciary is required to take all steps reasonably necessary for the management, protection, and preservation of the estate/trust assets in his or her possession. He or she may also be required to take legal action to determine the lawful ownership of disputed estate assets.
The law in NJ authorizes a fiduciary to sue for damages inflicted upon estate property. Under this statute, any person who injures, damages, or destroys property in the hands of a fiduciary or that is owned by the estate is liable to the fiduciary on behalf of all beneficiaries, creditors, and others with an interest in that property.
Action By or Against Fiduciaries
The most frequent issue(s) encountered by a fiduciary are:
- Claims filed by beneficiaries, creditors and/or others with an interest in the Estate or trust.
- Challenges to the decisions or conduct of the fiduciary during his/her service.
- Claims between fiduciaries where more than one fiduciary has been appointed to serve;
Claims like those described above are generally emotionally charged. Often an estate or trust beneficiary (or those who claim some economic entitlement or right(s) under the estate/trust administration) want(s) to go after the fiduciary. To pursue such a claim, a dissatisfied beneficiary must first satisfy N.J.S.A. § 3 B: 14-40 which prohibits the filing of legal action against a personal representative of an estate within six months to one year of his or her appointment. This six month to one year period is intended to enable the personal representative to learn about the estate, examine the condition of the estate, calculate its value and evaluate what debts must be paid.
What is a Breach of Fiduciary Duty to an Estate?
New Jersey law is very detailed about the standard of care to be followed by a personal representative, who is a fiduciary, (N.J.S.A. § 3B:10-26). Unless the terms of a decedent’s will direct otherwise, a fiduciary must deal with estate assets as a prudent person would act if he/she were still alive. The same holds true for an estate administrator and trustee. Each must collect and preserve estate assets and has a duty to actively supervise the administration of the estate/trust.
What Does It Mean a “Legal Standard of Care”?
The standard of performance and what the law expects of a fiduciary is to exercise a level of care, responsibility, caution, deliberation and foresight that an ordinarily responsible and prudent person would employ in his or her own personal matters regardless, of his/her degree of education, experience or intellect. What this means in practical terms is that the estate representative must act honestly, contentiously and effectively in handling all aspects of the estate. So long as an executor or administrator acts in good faith and uses reasonable discretion within the scope of his/her powers, any challenge to his/her actions or decisions will often fail.
Voidable Transactions by an Executor Because of a Conflict of Interest
Not all executors are honest and not all executors act with honorable purposes. I’ve seen proof of this over the years. In such situations, the law offers relief to those adversely impacted by a “bad” executor or administrator.
New Jersey statutes provide authority for voiding a transaction(s) made by a fiduciary which is tainted by a substantial conflict of interest. The law reads as follows:
“Any sale or encumbrance to a fiduciary, his spouse, agent or attorney, or any corporation or trust in which he has a substantial beneficial interest, or any transaction which is affected by a substantial conflict of interest on the part of the fiduciary, is voidable by any person interested in the estate except one who has consented after fair disclosure, unless: (a) the will or a contract entered into by the decedent expressly authorizes the transaction; or (b) the transaction is approved by a court after notice to interested persons” NJ.S.A 3B:14-36.”
Request for the Voluntary Resignation of the Estate/Trust Fiduciary
No one can be forced to serve as a fiduciary but once someone accepts the position and is appointed by the County Surrogate; resigning is not as simple as “I quit”. A Superior court judge has the power to release a fiduciary for good cause pursuant to NJ.SA § 3B: 14(c) 18, and often times will approve a request by a fiduciary to be released from continued service so long as the discharge is not prejudicial to the estate or persons having an interest in the estate/trust. Voluntary requests for release from service occur when a fiduciary wants to resign prior to the conclusion of his/her service or when the fiduciary can no longer fulfill his/her duties for reasons such as health, disability, relocation or death. The court will consider any opposition to the requested resignation but if the reasons for the resignation are reasonable, my experience is that judges will not force someone to serve who either doesn’t want to or can’t. But, don’t assume it’s a sure thing. If a judge feels that the resignation is not bonafide or other reasons compel continued service the application for resignation can be denied.
If I’m speaking to you and you’re contemplating a resignation as trustee or for that matter any fiduciary position contact me and let’s meet to discuss your situation. You can easily reach me toll-free at (855) 376-5291 or email me at fniemann@hnlawfirm.com.
Effect of Being Released as a Fiduciary
The effect of being released as a fiduciary is that he or she is discharged of all further duties of the office, except for providing a financial accounting of his/her term of service and paying over the funds and assets to the successor fiduciary. If the fiduciary is discharged, the court will consider whether the payment of a statutory commission for services rendered to the Estate/Trust should be approved, if reasonable and fair.
The discharge or removal of a fiduciary does not automatically release the fiduciary from potential liability for property which has been or should have been received, or for any neglect, default, miscarriage, or breach of trust in the performance of their services. It is especially important that a fiduciary who proposes to resign (or be discharged) give serious reflection upon his or her stewardship of the Estate or trust to be sure their successor will not go after them later because of some action during their tenure as fiduciary.
Title 3B, the Administration of Estates
Title 3B, the Administration of Estates, discusses the liability of an executor or administrator of an estate. It is particularly helpful is determining whether an executor or administrator of an NJ estate are personally liable in regard to administering the estate.
As to an estate administrator, his or her liability is most clearly asserted in 3B:14-32. That statute provides that “[a] fiduciary is individually liable for obligations arising from ownership or control of the estate or for torts committed in the course of administration of the estate but only if he or she is personally at fault.” (N.J. Stat. Ann. § 3B:14-32). That statute can be found here:
3B:14-32. Personal liability for obligations arising from ownership or control of estate; torts.
A fiduciary is individually liable for obligations arising from ownership or control of the estate or for torts committed in the course of administration of the estate only if he is personally at fault.
Section 3B:14-35 also clearly states that “[i]f the exercise of power concerning the estate is improper, the fiduciary is liable to interested persons for damage or loss resulting from breach of his fiduciary duty to the same extent as a trustee of a trust.” N.J. Stat. Ann. § 3B:14-35 (West). This statute can be found here:
3B:14-35. Liability of fiduciary for improper exercise of power concerning estate.
If the exercise of power concerning the estate is improper, the fiduciary is liable to interested persons for damage or loss resulting from breach of his fiduciary duty to the same extent as a trustee of an express trust. The rights of purchasers and others dealing with a fiduciary shall be determined as provided in N.J.S. 3B:14-28 and N.J.S. 3B:14-29.
Section 3B:10-26 provides the standards that a personal representative must follow in administering an estate. “[T]he personal representative shall observe the standards in dealing with the estate assets that would be observed by a prudent person dealing with the property of another, and if the personal representative has special skills… he is under a duty to use those skills.” N.J. Stat. Ann. § 3B:10-26 (West) for the benefit of estate beneficiaries, it would seem to follow that if a personal representative fails satisfy this standard; he would be liable for any negative consequences of such a failure. The link for that statute can be found here:
3B:10-26. Standards of care to be observed.
Except as otherwise provided by the terms of a decedent’s will, the personal representative shall observe the standards in dealing with the estate assets that would be observed by a prudent man dealing with the property of another, and if the personal representative has special skills or is named personal representative on the basis of representations of special skills or expertise, he is under a duty to use those skills.
Title 54 of the New Jersey Statute is relevant for the liability of estate fiduciaries specifically in regard to state taxation. Section 54:35-2 provides that “[e]xectuors, administrators, trustees, grantees, donees or vendees shall be personally liable for any and all such taxes until paid as hereinafter directed, for which an action at law shall lie in the name of the state of New Jersey.” N.J. Stat. Ann. § 54:35-2 (West). That section of the statute can be found here:
54:35-2. Tax, how payable; liability for non-payment.
All taxes imposed by Chapters 33 to 36 of this title (§ 54:33-1 et seq.), shall be paid to the state tax commissioner to be deposited by him when and as collected, with the treasurer of the state for the use of the state. Executors, administrators, trustees, grantees, donees or vendees shall be personally liable for any and all such taxes until paid as hereinafter directed, for which an action at law shall lie in the name of the state of New Jersey.
You Can’t Wait 8 Years After a Person’s Death and Then Decide to Sue an Estate Executor
Families often fall apart when a parent dies and the kids start dividing up the estate. Sometimes even after the estate is concluded, one sibling gets “buyer’s remorse” and wants to revisit the estate accounting.
After properly concluding the estate, the executor prepares and forwards an informal accounting and a Refunding Bond and Release to all beneficiaries. The beneficiaries sign the release after receiving it, so he or she can receive their inheritance. Sometimes a beneficiary tries to dishonor their release and seeks to re-open the estate and requests a formal accounting and injunctive relief from the executor. They often seek to regain the preservation of estate documents and financial records, years later after the estate has been closed.
The law of estate administration is clear. Where “all interested parties agree to an informal accounting and sign a release and refunding bond, none of them can later compel a formal accounting absent a showing of fraud, misrepresentation, mismanagement, undue influence by the fiduciary or substantial misunderstanding by the beneficiary.
By its express terms, the Release document uses the words “forever discharges the Executrix of the estate from all claims and demands whatsoever, in law or in equity, on account of or in respect to the estate.”
The legal doctrine of laches is clearly applicable to this type of claim by a remourseful beneficiary. Laches is a legal concept that applies when “the neglect for an unreasonable and unexplained length of time…” to do what in law should have been done prejudices the estate. It can be applied by a court of equity where a statute of limitation does not apply. The doctrine bars relief when the delaying party had ample opportunity to bring a claim, and the party invoking the doctrine was acting in good faith believing that the delaying party had given up on its claim.
When determining whether the doctrine of laches should be invoked, the court considers: (1) the length of the delay; (2) the reasons for the delay; and (3) how the circumstances of the parties have changed over the course of the delay.
The core equitable consideration used by teh courts in applying laches is whether a party has been harmed by the delay.
Involuntary Removal of a Fiduciary or “You’re Fired” The Forcible Removal of a Fiduciary
Many beneficiaries and interested parties meet with me and are insistent on removing the estate representative. What are the chances of success? The law offers some grounds for relief. A court may remove a fiduciary from office when:
1) A court order or judgment compels that the estate representative to do something and the representative neglects or refuses, within the time period fixed by the court to comply with the order. Some examples of this include, filing an inventory, rendering an accounting, posting security, selling assets, paying creditors, taking possession of valuable property, neglecting to keep beneficiaries informed to name a few.
2) The Estate Representative/Trustee has embezzled, damaged, or is alleged to have allowed the deterioration and loss of value to estate assets and property within his or her custody.
3) The Estate Representative/Trustee has abused the trust and confidence of his/her office which the law imposes upon a fiduciary;
4) The Estate Representative has physically left the state of New Jersey and/or neglects or refuses to proceed with the administration of the estate/trust and perform his/her fiduciary duties;
5) The Estate Representative has become incapacitated or mentally impaired to manage the necessary transactions of the estate;
6) Where there is more than one fiduciary, he/she has neglected or refuses to perform their duties or to join with the other fiduciary or fiduciaries in the proper administration and settlement of the estate.
Who Can Request That a Fiduciary Be Removed?
Not just anyone involved in a probate/trust administration has the right to remove a fiduciary. There is a concept in the law known as “standing” which means that only a “party with an interest in the estate can petition the court for removal except that a Superior Court on its own initiative can involuntarily remove a fiduciary. A fiduciary can also be removed upon a showing that he/she was appointed to the position as a result of fraud, or has demonstrated misconduct, incompetence, or a breach of trust. Sometimes the basis for removal is lack of mental capacity or being subject to the undue influence of others.
If removed or discharged the fiduciary must turn over to his/her successor all funds, assets and property and all relevant documents related to the estate within 60 days (or within such time as the court may allow).
A court may remove a fiduciary from office, without the fiduciary’s consent (called an involuntary removal), under any of the grounds listed in NJ.S.A. § 3B:14-2. Some examples of these grounds include the following:
- A significant mental or physical incapacity which interferes with the fiduciary’s service,
- Abuse of the trust of his/her position in the management of the trust, estate or the offices under his/her control,
- Embezzling, stealing, wasting or misapplying assets and funds in his/her care and custody.
- A significant violation of or, disobedience of a court order.
In addition, where more than one fiduciary is serving, the court may remove a fiduciary who continually neglects or refuses to perform his or her duties with the co-fiduciary(ies) or is adverse and/or contentious in his/her administration of the estate, which adversely impacts the ongoing administration settlement and winding up of the estate or trust.
Family Members Are Entitled to an Accounting and an Estate Inventory from a Fiduciary Which Includes a Former Power of Attorney, Trustee, and Executor
In NJ, our Chancery Court may compel someone who is serving as a fiduciary such as a Power of Attorney on behalf of another to account for monies expended during the time he or she held the Power. The laws also apply to a former Power of Attorney(s), Executor and trustees who can be compelled to provide an accounting (in a form and manner to be determined by the court) of all transactions involving a living or deceased person – including accounts jointly held with a spouse – during the time in which he or she held a fiduciary relationship through the date of death or the termination of the relationship.
Often, an Executor of an estate, trustee of a trust, and the former holder of a Power of Attorney fails to provide even the most minimal information to family members and beneficiaries about assets – including pre-death transfers from accounts – or the status of the estate. This failure is contrary to his or her obligations as holder of a Power of Attorney and as Executor/Trustee.
As a matter of law, an Executor, Power of Attorney and a trustee of a trust owe a fiduciary duty to the beneficiaries of the estate or the trust, respectively.” “An Executor has a fiduciary duty to act in the best interests of all the beneficiaries under the Will.” “The most fundamental duty owed by an Executor to the beneficiaries is the duty of loyalty, and the Executor is obligated to deal impartially with all beneficiaries.” An Executor cannot use his/her position to further his/her own personal interests.” Similarly, one who is both a Power of Attorney for another, trustee and the Executor under a Last Will owes a fiduciary duty to the estate and to the estate’s beneficiaries.
Fiduciaries are required to disclose both to the court and to the estate’s beneficiaries information pertaining to the estate’s assets. In that regard, N.J.S.A. 3B:16-2 states that a personal representative may be required by the court to “make and file a true inventory of the real and personal property which has come to his or hands, or into the hands of any other person and cause an appraisal to be performed by two impartial persons.”
Moreover, a court in equity has the ability to impose upon a fiduciary including a Power of Attorney whatever equitable remedy it deems necessary when there is a dispute. A judge sitting in a court of equity has a broad range of discretion to fashion an appropriate remedy in order to vindicate a wrong consistent with principles of fairness and the law.
To discuss your fiduciary questions or concerns, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.
Penalizing a Fiduciary for His or Her Dereliction of Duty
Under certain circumstances, the costs and expenses (i.e. accounting, legal expenses etc.) incurred when seeking to remove a fiduciary can be charged personally to the fiduciary. When the fiduciary either created the reason for removal or unnecessarily and wastefully created expenses because of his/her misconduct or negligence (especially if it is purposeful conduct or inexcusable delay and neglect), several reported court cases have held the fiduciary personally liable for the economic loss to the Estate/Trust. In one case a trustee who paid no attention to the trust fund but left its administration entirely in the hands of an acting non-trustee, not only was discharged, but assessed significant costs, fees and expenses incurred by the trust because of his willful indifference as a fiduciary.
Recovery of Assets from Another Fiduciary
When a fiduciary has intentionally misappropriated funds, his/her removal is a foregone conclusion, and if legal proceedings are filed to recover the assets in the possession of the discharged or removed fiduciary, (or against any other person in possession of the assets previously under the control of the fiduciary) the legal action will be successful. In such a case the fiduciary can expect that personal liability will be imposed against him/her for all damages associated with the lawsuit.
What to Do if You’re Unsure What to Do
Because the law is not always clear on every aspect of estate, trust, and POA administration and because the facts of a particular matter/issue may be unique, confusing or in dispute, as a fiduciary or beneficiary subject to the decision making of a fiduciary, you may want reassurance that what you are proposing to do is legal. In such a situation there is an available option you can select, that being “Ask the Judge”. Let me explain this option further.
Applications by a Fiduciary to a Court for Advice and Direction When In Doubt
New Jersey Court rule 4:95-2 allows a fiduciary to apply for instructions. Under this Rule, an executor, administrator, guardian, or trustee may bring an action for instructions from a Judge as to the exercise (or refusal to exercise) any statutory powers allowed by law or for advice and direction(s) in making investments, distributions payment of expenses from the estate.
This Rule applies not only to instructions on how to invest Estate funds, but to all the statutory powers given to a fiduciary under the law. In such cases, the fiduciary may apply to the court for directions after giving proper notice of his/her application to the court and to all persons involved in the matter.
Actions by Third Parties Against Fiduciaries
A seldom discussed topic is the personal liability of a fiduciary to others (third parties) for injuries and/or claims because of the actions taken by the fiduciary during his or her oversight of the estate or trust. Claims by third parties can be based upon a contract(s) signed by the fiduciary in his/her representative capacity or as a result of the ownership or control of estate and/or assets. Claims can also be made against the Estate and fiduciary for torts committed in the course of estate/trust administration.
The general rule (but there are many exceptions) is that a fiduciary is not personally liable on a breach of contract claim properly entered into during his/her fiduciary capacity and in the course of estate/trust administration unless he or she fails to reveal his/her fiduciary identity to the other side. Like I said, there are several exceptions to the law which protects a fiduciary from personal liability. If you are a fiduciary being personally sued or are someone who has filed a claim against a fiduciary personally, I invite you to call me personally at (855) 376-5291 or email me at fniemann@hnlawfirm.com.
Disagreement Among Multiple Fiduciaries
I know that in my practice, I almost never recommend the appointment of multiple fiduciaries. The reason is because there is a much greater potential for disagreement(s) and with disagreements come conflicts and with conflicts comes litigation. I concede however that one way to minimize conflicts among multiple fiduciaries is to insert a “majority rule” provision to avoid deadlock votes (deadlock means less than a majority vote).
But, what about bonafide disagreements among multiple fiduciaries? What about a fiduciary who disagrees with the majority decision? What can he or she do to protect themselves or the estate/trust/person under their watch? First off, where there are three or more fiduciaries and most fiduciaries decide, the minority can dissent. A fiduciary who fails to disapprove the decision of the majority by dissent can still be held personally liable for the actions of the majority unless he or she expresses promptly in writing to his co-fiduciaries, his or her dissent. If it is done, he/she is not be liable for the consequences of any majority decision.
The Takeaway
Fredrick P. Niemann Esq.
So, there you have it, a concise discussion of the topic of “claims by and against Fiduciaries, Trustees and Administrators.” I hope you have benefited from your time reading this page.
If we at Hanlon Niemann & Wright can be of assistance to you now or in the future, please
do not hesitate to contact me (855) 376-5291 or e-mail me at fniemann@hnlawfirm.com.
Estate Administration and Probate Lawyers serving these New Jersey Counties:
Monmouth County, Ocean County, Essex County, Cape May County, Mercer County, Middlesex County,
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