0717-TE-tips

Tips From the Pros: Determining Acceptance of Fiduciary Role—Not Always Simple but Critical

Charles A. Redd sheds light on the topic so that you can make an informed decision to serve or to decline.

Imagine a couple of scenarios in which you’re named as successor attorney-in-fact in a parent’s durable power of attorney (POA). In each scenario, the durable POA is “springing”; that is, it’s not activated unless or until the principal has become disabled.

Scenario 1: Your mother is named as the initial attorney-in-fact, and you’re named as successor attorney-in-fact, in your father’s durable POA. Although named as attorney-in-fact, you’re not actually serving as such because your father’s still controlling and managing his own property. You may not even know you’ve been named as successor attorney-in-fact. During the period in which you’re named, but not serving, as attorney-in fact, your father makes a gift of some of his property to you.

Have you engaged in an illegal act by accepting a gift from your father? More precisely, does your position as named, but not acting, attorney-in-fact establish a fiduciary relationship between your father and you such that your receipt of a gift from your father is presumptively the result of undue influence and therefore fraudulent?

Scenario 2: You’re named as successor attorney-in-fact in your mother’s durable POA. Although named as attorney-in-fact, you’re not actually serving as such because the individual named as initial attorney-in-fact (your father) is serving. Again, you may not even know you’ve been named as successor attorney-in-fact. During the period in which you’re named, but not yet serving, as attorney-in-fact, your father, acting as your mother’s initial attorney-in-fact, makes a gift of some of your mother’s property to you. At the time of this gift, your mother was in need of the income generated by the gifted property.

In your role as designated, but not yet serving, attorney-in-fact, did you possess and breach a fiduciary duty owed to your mother by not notifying her of the gift to you and by not taking steps to safeguard her interests?

Shelton

Both of the above scenarios and legal issues were presented in Shelton,1 a decision handed down by the Supreme Court of Illinois on May 18, 2017. The named successor attorney-in-fact was sued by his sister, in her capacity as executor of the parents’ estates. In Scenario 1, as executor of her father’s estate, the sister argued her brother had a fiduciary duty under Illinois law solely by virtue of his having been named as successor attorney-in-fact in their father’s durable POA. The court rejected this contention, observing the brother had no authority to act on behalf of the father, under the plain language of the father’s durable POA and under the Illinois Power of Attorney Act (the Act),2 unless or until the individual named as initial attorney-in-fact (the mother) refused to serve, resigned, became incapacitated or died.3 The court held that, so long as he lacked authority to act,4 the brother owed no fiduciary duties to his father. Thus, no presumption of undue influence could arise.

In Scenario 2, the sister, as executor of the mother’s estate, maintained that her brother, as successor attorney-in-fact under the mother’s durable POA, “participated” in the breach of fiduciary duty owed by the father to the mother. The sister argued her brother’s conduct was proscribed by Section 2-10.3(b) of the Act, which provides:

An agent isn’t liable for the actions of another agent, including a predecessor agent, unless the agent participates in or conceals a breach of fiduciary duty committed by the other agent. An agent who has knowledge of a breach or imminent breach of fiduciary duty by another agent must notify the principal and, if the principal is incapacitated, take whatever actions may be reasonably appropriate in the circumstances to safeguard the principal’s best interest.5

In ruling against the sister, the court pointed out that Section 2-10.3(b) refers exclusively to duties of an “agent” and the extent to which an “agent” may be liable for the actions of another agent, including a predecessor agent, without making any reference at all to a “successor agent’s” duties and potential liability. The court concluded the brother was merely the mother’s successor agent and not yet her “agent” as defined in the Act, and so Section 2-10.3(b) didn’t apply to the brother.

The court reached the obviously correct conclusions for both Scenario 1 and Scenario 2, but it’s noteworthy that the issues presented were litigated all the way to the Illinois Supreme Court.6 Shelton demonstrates the importance of correctly determining at what moment in time, if at all, a named fiduciary comes into possession of powers and assumes duties.

Knowledge and Acceptance

As a threshold matter, it seems self-evident that, for duties to be imposed on a designated fiduciary, at minimum, the fiduciary must have known, during the relevant time, that he was named. It’s simply inconceivable that an individual could be held to have been functioning as a fiduciary, and to have breached a fiduciary duty, if he didn’t know he was a fiduciary. The Shelton opinion doesn’t address this point.7 Moreover, as Shelton recognizes, an individual who’s named as a successor attorney-in-fact, but who clearly isn’t yet serving as such, has no fiduciary duties, whether common law or statutory, and so can’t breach any such duties. It follows that an individual who’s named as a successor attorney-in-fact but who doesn’t know his predecessor has failed or ceased to serve as such has no fiduciary duties. Likewise, it also follows that an individual who’s named as an
initial attorney-in-fact, but who hasn’t manifested in any way an acceptance of the role, can’t be held to possess, and so can’t breach, any fiduciary duties.8

An attorney-in-fact, whether initial or successor, is rarely called on to sign a durable POA in which he’s named. An attorney-in-fact’s acceptance of the position is typically understood to flow from his affirmative exercise of powers conferred by the durable POA. It appears there’s no way for an attorney-in-fact, by exercising a conferred power, to tailor his acceptance to apply only to the power he exercised. It’s sobering to consider that a named attorney-in-fact, by exercising a single, innocuous conferred power, could be assuming vast fiduciary responsibilities with respect to any and all assets owned by the principal. An individual who’s designated as an attorney-in-fact in a durable POA would be wise not knowingly to exercise any conferred power without having thoroughly reviewed the durable POA, and all assets owned by the principal, to determine the breadth of responsibilities he’s assuming.

Trustees

These concepts relate to trustees as well, but a few of the mechanics are different. An initial trustee will almost always be expected to sign the trust instrument as trustee. Accordingly, an initial trustee typically will not only know he’s been named as such but also, by signing, will have indicated his acceptance of the role. However, a successor trustee will rarely be asked to sign the trust instrument in which he’s named and so, in relation to ascertaining when he’s accepted the powers and duties of the office, is largely in the same posture as a successor attorney-in-fact. Even more clearly than in the case of an attorney-in-fact, it seems highly unlikely that a successor trustee could ever accept only part of a trusteeship. This reality is less troubling for a trustee than for an attorney-in-fact, though, because a trust is generally a distinct property management vehicle whose assets can readily be identified and located.

Uniform Trust Code

A couple of provisions of the Uniform Trust Code (UTC) are relevant.9 First, UTC Section 801 expressly recognizes that acceptance of the trusteeship is a prerequisite to the trustee’s having a duty to administer the trust.10 Just as with attorneys-in-fact, it’s axiomatic that, in the absence of a duty, there can be no breach of such duty. Second, UTC Section 701 provides standards specifying how a trusteeship may be accepted. The first alternative prescribed is by substantially complying with a method of acceptance provided by the terms of the trust. The second alternative, which applies if the terms of the trust don’t provide a method or the method provided in the terms isn’t expressly made exclusive, is accepting delivery of the trust property, exercising powers or performing duties as trustee, or otherwise indicating acceptance of the trusteeship.11 Presumably, the first alternative method must be one that’s reasonably capable of being triggered or avoided and must be known to the prospective trustee. The last prong of the second alternative (“otherwise indicating acceptance of the trusteeship”) is obviously quite amorphous and could be a trap for the unwary.

Managing the Risk

Performing fiduciary services always involves some level of risk. Assuming risk is part of what fiduciaries are expected to do and get paid for. That said, careful fiduciaries strive to manage the risks they take on. An essential element of that risk management is knowing when you’re approaching the juncture of accepting appointment so that, instead of tumbling into a fiduciary relationship, you can make an intelligent, considered decision to serve or to decline.    

Endnotes

1. In re Estate of Thomas F. Shelton, Docket Nos. 121199, 121241 cons. (Ill. 2017).

2. “A principal may designate one or more successor agents to act if an initial or predecessor agent resigns, dies, becomes incapacitated, isn’t qualified to serve, or declines to serve.” 755 ILCS 45/2-10.3(a).

3. The court seemed to overlook the fact that the status of the initial attorney-in-fact was not then directly relevant because the principal was still handling his own business and financial affairs.

4. Actually, the opinion isn’t entirely clear as to when the brother’s fiduciary duties would have come into existence. Citing 755 ILCS 45/2-7(a), the court states, “it is the agent’s exercise of power pursuant to the authorizing document which triggers the agent’s duty to the principal” (emphasis added).

5. 755 ILCS 45/2-10.3(b).

6. In fact, the Illinois Appellate Court had held in favor of the sister in Scenario 2. In re Estate of Shelton, 2016 IL App (3d) 140163.

7. It may be the brother didn’t assert he lacked knowledge of his designation as successor attorney-in-fact.

8. See 755 ILCS 45/2-7(a) (“The agent shall be under no duty to exercise the powers granted by the agency or to assume control of or responsibility for any of the principal’s property, care or affairs, …”); 755 ILCS 45/2-7(b) (“An agent that has accepted appointment must act in accordance with the principal’s expectations …” (emphasis added)); Section 404.705.4, RSMo. (“A person who is appointed an attorney in fact under a durable power of attorney has no duty to exercise the authority conferred in the power of attorney, whether or not the principal has become disabled or incapacitated, is missing or is held in a foreign country, unless the attorney in fact has agreed expressly in writing to act for the principal”); see also Section 114 of the Uniform Power of Attorney Act (2006).

9. In most non-Uniform Trust Code (UTC) states, the law relating to acceptance of a trusteeship will be the same as or similar to the UTC provisions discussed in this paragraph.

10. UTC Section 801 provides: “Upon acceptance of a trusteeship, the trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries, …”  (emphasis added).

11. UTC Section 701 also provides that, notwithstanding the first and second alternatives, “[a] person designated as trustee, without accepting the trusteeship, may act to preserve the trust property if, within a reasonable time after acting, the person sends a rejection of the trusteeship to the settlor or, if the settlor is dead or lacks capacity, to a qualified beneficiary; and inspect or investigate trust property to determine potential liability under environmental or other law or for any other purpose.”

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