Duties of Fiduciaries
Financial Planners, Trustees, and Executors
Chris Tyler, Dylan Franklin, J.J. LeVan
Nature of Fiduciary Relationship

Fiduciary relationships arise when a client entrusts their money to a
professional to make or influence important client decisions

Fiduciary duty: level of care bestowed upon a professional entrusted with
other people’s money

Fiduciary duties are commonly imposed by law
Fiduciary’s Professional Responsibility

To act solely in another parties best interest
Elements of a Fiduciary Relationship

Heightened client vulnerability

Dominant position of financial control or knowledge by the fiduciary
Usually…

Accountant is not considered a fiduciary

AICPA Professional Code of Conduct creates something similar:


Objectivity

Integrity

Free from conflicts of interests

Honesty
*Auditing and tax engagements don’t generally create a fiduciary relationship
Fiduciary Relationships in Accounting

Created when clients entrust money to their accountants

Examples:

Accountant oversees client investments

Accountant serves as trustee of a trust fund

Accountant serves as retirement plan asset manager

Accountant serves as executor of deceased client’s estate
In the News

May 2015: U.S. Supreme Court ruled against Edison in the case of Tibble et al.
vs. Edison International et al.

Edison, a 401(k) plan was found to have breached their fiduciary duties

Edison chose retail-priced investments over less expensive institutionally
priced versions of the same investments

Supreme Court stated that benefit plans have a ““continuing duty to monitor
trust investments and remove imprudent ones”
Personal Financial
planners and asset
managers
Applicable professional standards

CPA’s that provide personal financial planning service must follow

Statement on Standards in Personal Financial Planning Services


Governs conduct of CPA’s who design or implement strategies in

Estate planning

Risk management

Retirement planning
Applies when CPA’s sell

Insurance

Securities

Other financial products
Specific duties associated with custody
of assets

According to IFAC Code has 5 core duties
1.
They must not commingle client assets with their own assets
2.
They must use assets only for their intended purpose
3.
They must maintain up-to-date accounting for these assets and the related
income generated
4.
They must comply with all relevant laws and regulations
5.
If client funds appear to have been derived from illegal activities, they must
follow all applicable laws and avoid associating with others who might
discredit them or the accounting profession.
How to avoid creating a fiduciary
relationship

Ensure that clients have the ability to understand and evaluate the advice
given to them

Ensure that clients understand that they have the ultimately responsibility for
a decision

Keep clients fully informed about relevant facts, so they are able to make
their own decisions

Encourage clients to consult with others, such as attorneys and insurance
professionals, about the advice given to them

Expressly enter into agreements with clients that specify that a fiduciary
relationship in not created
What is a Trust?

A relationship where one party holds property for another

Party who holds property is the Trustee

Trustee: An accountant, Lawyer, or close relative

Set up to ensure that wealth is managed and disbursed wisely after a
grantor’s death

Minimizes estate taxes

Shields assets from creditors and litigation claims

Generally established in a written will
Structure of a Trust
Grantor
Cash or
Other Assets
Trust
(Managed
by
Trustee)
Beneficiaries
John D. Rockefeller
-
Founder of the Standards Oil Company
-
Considered one of the wealthiest historical figures in American history
-
First person to ever reach a net worth $1 billion
-
Estimated adjusted wealth at time of death was $374 billion
-
Considered one of the greatest philanthropists of all time
The Kennedy Family
-
Father Joseph Kennedy accumulated wealth as a bootlegger
-
Family fortune today roughly $1 billion
-
Majority of family wealth today held in trusts ranging from tens of thousands to as much
as $25 million
-
Result:

Some assets are untaxable

Beneficiaries cannot tap into more than 10% of the principal
Types of Trusts

Intervivos Trusts: Take effect when grantor is alive

Testamentary Trusts: Take place when a grantor dies

Irrevocable Trust: When the grantor permanently relinquishes control over
assets

Spendthrift Trust: Prevents beneficiaries who are minor children from
accessing trust wealth

Living Trusts: A trust that a grantor creates for their own benefit

Blind Trust: Beneficiaries are prevented from knowing about the trust’s assets
or earnings performance
Why Establish a Living Trust?
1.
Protecting Property for Certain Beneficiaries
2.
Reduce or Eliminate Estate Taxes
3.
Managing Property upon Incapacity
4.
Avoiding Probate
5.
Avoiding a Will Contest
6.
Privacy
The Political Implications of Blind Trusts
https://www.youtube.com/
watch?v=JgT1DJSPAOM
Split-Interest Trusts
Grantor
Income
Beneficiaries
Income
Trust
(Managed
by Trustee)
Principal
Remainderman
Duties of Trustees
1.
Duty of Loyalty: A trustee manages a trust for the beneficiary, but they are
expected to be loyal to the grantor
2.
Duty of Care: Without clear guidance, the trustee should invest in low-risk
investments
3.
Duty of Impartiality: A trustee must select investments that further the
interest of all trust beneficiaries
Example-Duty of Care
A trustee primarily invested trust funds in government bonds. However, she
also invested a small portion of the trust’s assets in a gold mine. The gold mine
was quite risky, standing alone. However, the trustee determined that, in times
of high inflation, the value of gold mines tends to go up as the value of
government bonds goes down. Trust documents do not provide any guidance
about the grantor’s investment goals. Did the trustee violate her duty of care?
Solution

No. Under modern portfolio theory, the gold mine actually reduced the
overall riskiness of the trust’s investments by moving in value in the opposite
direction of the trust’s existing bond holdings. In statistical terms, the gold
mine acted as a risk-minimizing hedge because its returns were inversely
correlated with returns on other trust investments.
When you don’t Establish a Trust
https://www.youtube.com/watch?v=WKjWnNsCrHs
-
Probate can take anywhere from 6 to 9 months

Result: Potential beneficiaries cannot access assets until probate is complete
 Could cost heirs up to 10% of the value of assets
The Vanderbilt Family

Cornelius Vanderbilt accumulated a
$100 million fortune during his
lifetime.

6 generations later Anderson
Cooper, a direct descendent,
received no inheritance.
Nature of an Estate

Upon death, a person’s property transfers to an estate

An executor manages the estate, usually designated in the will

If no will, court appoints an administrator to the estate

Usually, a close family member
Executor/Administrator Duties

Executors and Administrators have fiduciary duty in managing the estate
Duties:

Gather deceased’s assets

Investing assets carefully

Winding up deceased’s affairs

Repaying deceased’s outstanding debts

Distributing estate property in accordance w/ deceased’s wishes
Accountants in Estate Practice

Must prepare a final balance sheet

Estate tax return must be filed if deceased has >$5mil net worth

May have to file estate income tax return if estate continues to earn income
postmortem

Ex: dividends, interest, rent
Example
When the founder of a real estate business dies, her will appointed her
second husband as the executor. The will also stated that estate net assets
should be divided equally among the deceased’s three children.
After becoming the executor, the deceased’s widower received invoices to
pay the casualty insurance premiums on the estate’s real estate holdings. Due to
his grief and unfamiliarity with the estate process, though, he failed to pay these
bills. One of the properties now has suffered a large fire loss, and one of his
stepchildren has decided to sue him for breach of fiduciary duty, Is this executor
personally liable for this loss?
Solution

Yes. An executor has a fiduciary duty to manage estate assets prudently. If an
executor is unfamiliar with managing an estate, he has a responsibility to hire
an attorney or other advisor to assist in fulfilling his duties. For these reasons,
people designated as executors sometimes decline to serve in this capacity
Ethical Considerations by Tax
Professionals
Negotiating Tax Refunds

Sometimes checks are sent directly to accountants who handle estate and
trust affairs. i.e., Tax refund checks
 Purpose: Convenience

Accountants who manage these trusts should maintain a separate bank
account.

Potential for embezzlement
Embezzlement
Example
-
Attorney Robert C. Buschmohle
embezzled nearly $400,000 from
a living trust fund
-
He was supposed to be paid
$8,000 for his services
-
The Fund was set up Derek Tate
for his two sons six weeks before
he died of cancer
-
Most of the $500,000 living trust
is gone
-
Buschmohle could be sentenced
up to 20 years
Conflicts of Interest

Arise when the accountant performs services for multiple beneficiaries of a
trust or estate

Tax Professionals have a professional duty to advocate on behalf of the
beneficiaries economic interest

What if a tax election benefits one beneficiary, but negatively impacts
another?
Bloodline
Auditor independence
requirements for trustees
and executors
The independence rules
CPA will lose independence to the client when
1.
The CPA is authorized to make investment decisions for the trust
2.
The trust is a significant stockholder in the client company
3.
The company’s stock is a significant asset of the trust
Example
You are an experienced CPA who has audited Kimberly Company’s financial
statements for over a decade.
An elderly client recently formed a trust for the benefit of her grandson,
Burton James, and you have agreed to serve as the trustee. The trust gives you
the authority to invest trust assets “in any manner you choose, as long as the
investment strategy is prudent.” The trust currently holds over 80 different
stocks, including a few shares outstanding in Kimberly Company. Do you satisfy
the independence standard to audit Kimberly Company?
Solution
No. A CPA-trustee loses the independence to audit a client whose stock is
owned by the trust in any of three situations. In this situation, you have
investment decision-making authority for the trust. Therefore, the independence
rules preclude you from auditing Kimberly Company, whose stock is owned by the
trust.
The trust’s ownership interest in Kimberly Company was insignificant, and
Kimberly Company’s contribution to the trust’s investment portfolio was
insignificant. However, the CPA’s investment decision-making powers made
consideration of these additional factors irrelevant.
Am I Ethical?
In 1963, a successful entrepreneur created a trust for her 14 grandchildren.
Trust documents did not provide instructions on how trust assets should be invested.
However, a scrapbook created by this business owner contained several handwritten
letters in which she proclaimed her “hatred for the tax devil’s visit every April 15.”
The scrapbook also contained a 1963 newspaper article that correctly reported that
the United States had a 91% top income tax rate and 77% top estate tax rate.
As the trustee in charge, you now have to decide between two courses of
action. Choice #1 is to invest trust assets in a very conservative manner. This is the
choice preferred by 11 of the grandchildren. Choice #2 is to invest trust funds in
riskier, growth-oriented assets. This choice will greatly minimize the beneficiaries‘
income and estate taxes, but only 3 of the grandchildren favor this choice. Which
action should you choose?
Am I Ethical?

A. Select Choice 1 because a majority of the beneficiaries favor this approach

B. Select Choice 1 because a trustee has a duty to conservatively protect trust
assets

C. Select Choice 2 because a trustee has a duty to maximize after-tax returns

D. Select Choice 2 because a trustee has a duty to carry out the wishes of the
party who creates a trust
Am I Ethical Solution

D. Select Choice 2 because a trustee has a duty to carry out the wishes of the
party who creates a trust
You should select this option even though a majority of the beneficiaries prefer
the first option. A trustee’s principal duty is to effectuate the wishes of the
grantor. Here, the surrounding circumstances clearly indicate that one of the
grantor’s main goals was to minimize the family’s tax burden. Also, as an
entrepreneur, the grantor apparently was not particularly risk-averse.