Many individuals serve as fiduciaries. Some serve as trustees of trusts created by a family member or friend or as executors of their estates. Others serve as trustees of a charitable trust or as directors of a charitable corporation. Most realize that their fiduciary roles subject them to certain duties. While the exact standards may vary from state to state, all fiduciaries must generally act with prudence and reasonable diligence.
When investments are performing well, few will complain that a fiduciary is not meeting the required standard of care. However, “prudence” and “diligence” may take on new meanings in a world where investment values can swing by 10 percent in a day, and almost 50 percent in a year. Of course, no one fiduciary can be expected to have a perfect crystal ball, but it becomes increasingly important for trustees and other fiduciaries to take steps to illustrate that they have acted with prudence, and to document their diligence.
For example, a trustee should monitor trust investments regularly and seek advice when needed. He or she should document any decisions and their rationale. If the trustee decides to liquidate an account, he or she should document the reason. If the trustee decides not to diversify investments, he or she would be well-advised to obtain the beneficiaries’ consent and a written release agreement that would hold him or her harmless against future claims. Even if a decision proves to have been wrong in hindsight, careful documentation of the steps that led to the decision may provide valuable protection for the fiduciary.
Beyond standard diligence, fiduciaries should consider other possible effects of dramatic market changes. For example, North Carolina law limits the use of charitable endowment funds that are currently worth less than their historic cost. Many states, including Virginia, have eliminated this historic dollar limitation, but charitable trustees and directors should check for any limitations or requirements that apply in their state.
As another example, the trustee of a trust that provides only for distributions of trust income to the current beneficiary may wish to consider an equitable adjustment or conversion to a unitrust if income has been significantly reduced. (See page 3, “When Income Is Not Enough,” for more information on these options.)
Obviously, the current volatile financial markets will leave many trust and estate beneficiaries disappointed, and many charities struggling to remain solvent. This cauldron of unhappy people will undoubtedly result in lawsuits against fiduciaries who are struggling to cope with the difficulties as best they can. The reward for serving as a fiduciary, often a favor or pro bono effort, could prove to be personal liability.
Hopefully, the dramatic economic events will begin to calm in the days ahead. But until that time, all fiduciaries must remain vigilant and carefully document the reasons for any decisions. In good times no one complains, but in bad times prudent fiduciaries need evidence to show that they did their jobs reasonably under the circumstances.