Fiduciary for a Trust or Estate? Consider This.
by Aon Affinity
CPAs often act as a client’s confidant and know the client’s concerns about children and spouses, as well as the complexities of relationships among estate beneficiaries. In a recent claim, a CPA was asked by a long-time client to act as executor of his will. The CPA agreed to serve as executor, despite knowing the client was disinheriting family members, leaving his entire estate to a son with a history of mental illness and drug abuse.
After the client’s death, the son asserted the CPA stole from the estate, charged the estate excessive fees, and made errors in the preparation of the estate tax return causing the beneficiary to receive a smaller inheritance. After years of litigation and a rapidly diminishing estate, the case was settled.
In retrospect, the CPA should have considered declining to serve as executor because he knew the exclusion of interested parties as estate beneficiaries could create problems. After being appointed executor, the CPA could have engaged experts to advise about decisions affecting estate and trust asset management and distributions. However, there was little the CPA could have done to mitigate the risk of experiencing a breach of fiduciary duty claim from parties to the estate given their animosity towards one another.
What is a Fiduciary? Black’s Law Dictionary defines a fiduciary as (1) “One who owes to another the duties of good faith, trust, confidence, and candor, (2) One who must exercise a high standard of care in managing another’s money or property.”
When acting in a fiduciary capacity, one must treat the other’s interest as paramount. A fiduciary has a duty of care to the equitable titleholders and is held to the highest standard of care that exists under the law. Fiduciaries must be prepared for every decision to be closely scrutinized.
CPAs are subject to ethical duties of due care under the AICPA Code of Professional Conduct (AICPA Code) and state board of accountancy regulations. In litigated malpractice claims, CPAs acting in a fiduciary capacity are subject to heightened standards that are more difficult to defend.
Risks of Serving in a Fiduciary Capacity
by Aon Affinity
Serving in a fiduciary role may give rise to conflicts of interest. Consider a CPA firm that provides estate planning services to a client which results in the creation of a trust. If the firm receives a referral fee in connection with the sale of a life insurance policy purchased as part of the estate plan, or a firm member is designated as trustee, was the planning in the client’s best interest, or could these relationships be viewed as impairing the objectivity of the CPA rendering services? Similarly, if a trustee hires its own CPA firm to provide professional services to the trust, this action may be considered as impairing objectivity.
A fiduciary’s relationship with estate or trust beneficiaries also may create conflicts. For example, if the CPA acting as a fiduciary renders professional services for some of the beneficiaries, potential conflicts may arise. Likewise, if the CPA serves as co-trustee with a beneficiary, and a dispute arises among the beneficiaries, the other beneficiaries may allege the CPA was responsible for monitoring the co-trustee’s actions and preventing them from making decisions detrimental to their interests.
As the example in the news section demonstrates, before agreeing to serve in a fiduciary capacity for an estate or trust, CPAs should consider parties that may have standing to assert a breach of fiduciary duty claim in this context. A long-standing relationship between the CPA and decedent will not matter to parties who believe trust or estate proceeds were mismanaged.
Familiarity with the client sometimes leads CPAs serving in a fiduciary role to inadequately document discussions with and instructions from the settlor. Years later, these decisions may be questioned. As the rights of trust and estate beneficiaries can conflict, the risk of claims related to inadequately documented decisions increases.
CPAs often lack experience serving in fiduciary roles. When acting in this capacity, CPAs should examine every significant decision and document their thought process, with respect to:
- Investment strategy
- Selection and oversight of insurance providers, investment advisors, tax consultants and other professional service providers, including one’s own CPA firm, if retained
- Preservation or liquidation of estate or trust assets, including related tax consequences to the beneficiaries
- Beneficiary distributions, including those assets that are distributed, the amount and timing, and resulting tax consequences
Decisions must not only make sense and be fiscally sound, but also must comply with the terms of the relevant document. Finally, the CPA’s duties as a fiduciary may be required while simultaneously engaging in a demanding professional practice.
Mitigating Risk When Serving in a Fiduciary Role
by Aon Affinity
Before agreeing to serve in a fiduciary role for an estate or trust, CPAs should evaluate the risks associated with the appointment.
Due Diligence When an individual is solicited by an existing client to serve as a fiduciary, due diligence should be performed to determine if the CPA firm has other clients who may become beneficiaries of the trust or estate, such as family members. If so, the individual should discuss this possibility with the client and consider declining to serve in the role. If a co-trustee or co-executor is also a beneficiary of the trust or estate, the relevant documents should address this issue.
Potential Conflicts of Interest When a potential conflict of interest arises, and the CPA believes that professional services can be performed with objectivity, the CPA should disclose its existence to the appropriate parties and obtain their consent prior to performing the service. However, obtaining consent does not cause a conflict of interest to dissipate. It simply permits the CPA to render services in accordance with the guidance included in the AICPA Code. CPAs should review guidance contained in Interpretation 102-2 under Rule 102, Integrity and Objectivity as well as the Ethics Rulings on Independence, Integrity and Objectivity, and consult an attorney, peers and available ethics hotlines before agreeing to allow a firm member to serve in a fiduciary role that may be viewed as a conflict of interest. If the CPA assists a client in formulating an estate plan and a CPA firm member acts as a fiduciary for the trust or estate, the resulting conflict of interest cannot be eliminated.
Beneficiary Relationships Presuming the fiduciary role requested does not present a current or anticipated conflict of interest, the CPA should learn about the beneficiaries, their relationship with the client, and other interested parties. If relationships are acrimonious, interested parties are not beneficiaries, or the client’s disability or death is likely to result in potential conflict, a number of measures should be implemented.
Continuing Obligations to Beneficiaries Individuals serving in an ongoing fiduciary capacity have a continuing duty to potential beneficiaries despite other professional commitments. Assets in an open trust or estate should be evaluated at least annually regarding the appropriateness as investments, costs associated with maintaining or liquidating them, the resulting impact on beneficiary distributions, and to ensure adequate insurance coverage is maintained. Estate and income tax returns must be timely prepared and filed, and other tax filing obligations must be considered.
Insurance Coverage Before agreeing to serve in a fiduciary role, the CPA also should review applicable insurance coverage with their agent or broker. Insurance coverage for serving as a fiduciary of a trust or estate may differ from that applicable to services rendered in the practice of public accountancy.
Consultation with Legal Counsel If not already consulted, once the decision to serve in a fiduciary role is made, the CPA firm’s attorney should review relevant documents to ensure clear definition of the testator’s intent, instructions of the testator, the responsibilities and authority of the fiduciary, and circumstances under which the individual would have the right to withdraw from the role, among other matters. Costs associated with retaining counsel for this purpose also should be considered and discussed with the client. In addition, the CPA should discuss with an attorney the insertion of indemnification, hold harmless or limitation of liability clauses into the relevant documents to limit the fiduciary’s personal liability. Such provisions can be helpful in preventing or mitigating claims alleging breach of fiduciary duty when acting in good faith and in accordance with the responsibilities outlined in the documents.
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Accountants Professional Liability Risk Control, CNA, 333 South Wabash Ave., 36S Chicago, IL 60604.
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