Financial Management and the Liability of an Attorney-in-Fact

What is “fiduciary responsibility”?

            As an attorney-in-fact, you are fiduciary to your principal. A “fiduciary” is a person who has the responsibility for managing the affairs of another, even if only a part of that person’s affairs are being managed. A fiduciary has the responsibility to deal fairly with the principal and to be prudent in managing the principal’s affairs.

            You, as an attorney-in-fact, are liable to third parties only if you act imprudently or do not use reasonable care in performing your duties. If ever you are acting as an attorney-in-fact and are unsure as to whether you are doing the right thing, seek out professional advice not only to protect yourself but to protect the principal.

What if I make a bad investment decision? Am I liable for any loss?

            So long as you act prudently, use care, and are cautious about managing the principal’s affairs, you will probably not be liable for individual bad investments. The law looks at your management of the entire investment portfolio and determines whether, as a whole, your conduct was proper. The law says that no one specific investment is enough to show you acted imprudently. Still, anyone can sue for any reason. Whether a person will be successful is another question altogether.

            If a person believes that you made bad investment decisions and that those decisions affected him or her, the person may sue you but the court will look at your management of the entire investment portfolio, not just the bad investment or investments. You may be liable for any losses only if the court finds that, as a whole, you were not prudent in your investments.

Should I diversify the Principal’s investments?

            If you have responsibility for managing the financial affairs of the principal, the general rule is that you must diversify the principal’s investments. This means that you should spread out the principal’s money so that you spread out the risk. In this way, if one or two investments go bad, there are other monies that survive. If you feel that it is in the principal’s interest not to diversify, you are free not to do so, but by not diversifying the investments you increase your exposure to liability.

Am I liable if I acted as prudently as possible but the investments still did poorly?

            The law is a test of conduct and not resulting performance. In other words, so long as you were reasonably cautious and prudent with the investments, you are not liable. Even the most experienced and conservative of investors lose money from time to time.

Can I sacrifice a gain in principal in favor of more income?

            Principal is the mass of assets or capital accumulated by the principal. Income is money that comes in and adds to the principal’s principal or gets spent. You, as a fiduciary, have the responsibility to consider both the safety of the principal’s capital and the reasonable production of income.

            This is a balancing act in which you need to decide how much income the principal requires and how much capital must be sacrificed, if any, to generate that income. If an asset is producing no or little income, you need to consider trading off that asset for a more productive one.

Is there such a thing as being too cautious when investing the Principal’s money?

            Yes. An attorney-in-fact may keep the principal’s money very safe but if it produces no income, the attorney-in-fact could still be said to be mismanaging the principal’s affairs. The law states that you have a duty to pursue an investment strategy that considers both the reasonable production of income and the safety of the capital.

What things should I consider when making investment decisions?

            When making investment decisions as an attorney-in-fact, you should first weigh the size and complexity of the principal’s estate against your own ability to manage finances. In certain instances, the most prudent investment decision is to seek professional advice on asset management.

            Otherwise, you should consider such things as: (1) the general economic conditions, for example, whether a recession is looming; (2) the possible effect of inflation; (3) the expected tax consequences of investment decisions or strategies; (4) the role each investment or course of action plays within the overall portfolio; (5) the expected total return, including both income yield and appreciation of capital; and (6) the costs incurred in a transaction such as brokerage fees or commissions.

Can I have other people do things for me as attorney-in-fact?

            You may hire accountants, lawyers, brokers, or other professionals to help you with your duties., but you can never delegate another person to act for you as attorney-in-fact. The Power of Attorney was given to you by the principal and you do not have the right to give that power to anyone else.

To learn more about estate planning and elder law, visit Estate and Elder Planning by David Wingate at www.davidwingate.com. For an Initial Consultation, call (301) 663-9230. We can assist you with powers of attorneys, living wills, wills, trusts, Medicaid planning, and asset protection. With office locations in Frederick, Washington, and Montgomery Counties, Maryland, we are here to provide you with peace of mind.

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