North Carolina courts have provided that a “fiduciary relation” exists in all cases where there has been a special confidence reposed in one who in equity and good conscience is bound to act in good faith and with due regard to the interests of the one reposing confidence. Furthermore, North Carolina courts provide that a fiduciary duty can arise by operation of law or based on the facts and circumstances. In the case of estate planning and estate administration, we are speaking of clearly defined fiduciary roles which arise as an operation of law. The primary examples are agent and principal under a power of attorney, personal representative and heir or devisee of an estate, and trustee/s and beneficiary/ies of a trust. Over the course of a three-part blog series, I will discuss these three relationships and how the principal, testator and settlor can approach compensating their fiduciaries.
As a general matter, N.C.G.S. § 32-54 provides some factors which should be considered in determining the reasonableness of compensation for all three of these fiduciary roles, to wit:
- The degree of difficulty and novelty of the tasks required of the trustee.
- The responsibilities and risks involved.
- The amount and character of the trust assets.
- The skill, experience, expertise, and facilities of the trustee.
(5) The quality of the trustee’s performance.
(6) Comparable charges for similar services.
(7) Time devoted to administering the trust.
(8) Time constraints imposed upon the trustee in administering the trust.
(9) Nature and costs of services delegated to others by the trustee.
(10) Where more than one trustee is serving, the reasonableness of the total fees paid to all
trustees.
Powers of Attorney: Agent Compensation
A fiduciary relationship is created between a principal and agent when a person (the principal) executes a power of attorney granting certain authority for another person (an agent) to act on the principal’s behalf. Acting pursuant to authority under a power of attorney is a responsibility that requires time and attention. When a child is acting as a power of attorney for a parent, compensation may or may not be desired. In other cases, such as a professional acting as an agent or a corporate fiduciary, it may be clearly appropriate or part of an agreed upon arrangement. Of importance, I always inform my clients that naming an individual as a fiduciary in their estate planning documents does not typically create a legal obligation for the nominated fiduciary to serve. Although you may have discussed it with the nominated person, circumstances change. Considering and ensuring adequate compensation in your estate planning can provide an incentive for the person you have nominated in your documents to serve especially in cases where they are not entitled to inherit from your estate.
N.C.G.S. § 32C-1-112 provides that if the terms of the power of attorney specify the amount or the way the compensation is to be determined, the agent is entitled to the compensation as specified. Additionally, a principal could certainly provide that their agent is not entitled to compensation.
With respect to not allowing compensation, even when a child is anticipated to be the acting agent, prohibiting compensation is likely a bad idea because circumstances can significantly change from the time you create the power of attorney and the time during which the child may be serving as agent. Furthermore, just because a right to compensation is provided does not mean the child has to assert that right.
With respect to specifying a specific compensation scheme, this may sound like a good idea; however, a power of attorney is a planning instrument which is ideally created years or decades before an agent is needed to act on behalf of the principal. Accordingly, devising a compensation scheme which will work years or decades in the future is a difficult task. For example, $50 an hour in 2023 may seem reasonable but the same may not be so in 2043. Trying to devise a scheme based on a percentage of the assets is also difficult because the size of the estate is subject to change and effectively managing small portfolios can require just as much time and effort as large ones. Additionally, agents under powers of attorney are not generally tasked with growing an estate or investing assets like trustees of a trust, but instead are often tasked with preserving and protecting the estate. Accordingly, a percentage-based or performance scheme does not quite fit with serving as an agent as it does with trusteeship. That said, there are creative hybrid schemes of percentage based, hourly or flat rate compensation to consider depending on the circumstances.
In some cases, the best approach may be to allow reasonable compensation without further detail. Approval by the principal of the power of attorney is required if they are competent. However, powers of attorney are often used when the principal has become incapacitated. In these cases, if not specified otherwise, the agent must petition the clerk of superior court who determines what is reasonable. However, the principal can shift the burden by providing that their agent is entitled to reasonable compensation and if any interested party shall question the reasonableness, then said interested party must petition the clerk of superior court. Other options include providing that a licensed North Carolina attorney in good standing should determine reasonable compensation or a particular attorney or law firm. I often recommend this method because it adds flexibility for future economic and legal trends regarding reasonableness of compensation, bypasses the issues with predicting future uncertainty, and also avoids court intervention and challenges by disgruntled heirs.
The best approach depends on the circumstances so a principal making a power of attorney should be sure to address the topic with their estate planning attorney.
Conclusion
In summary, along with the many other considerations to discuss with your estate planning attorney, compensation of your fiduciaries is of critical importance. There is no right or wrong approach, and your estate planning attorney can help you determine the approach the makes the most sense given your circumstances.
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