What Is a Fiduciary?

Fiduciary, fiduciary duty, breach of fiduciary duty; what do these terms mean? You may have heard the word or phrase used. A fiduciary is a person or company managing assets for the benefit of someone else. Fiduciary duty is usually named in a legal document. At Dana and Associates estate planning practice these duties are explained in our trusts, last will and testaments and/or durable powers of attorney.

There is a very high standard when serving as a fiduciary. This means that there are legal and ethical obligations to serve as a fiduciary usually detailed in a legal document that gives instructions on how the fiduciary should act. Moreover, further fiduciary guidance can be found in local state statutes and ruling in previous court cases.

What Is Fiduciary Duty?

Fiduciary duty refers to the standard of care that a fiduciary must follow. If the fiduciary fails to follow that duty, he or she may be subject to personal liability. This is important to consider when you are working with an attorney to create an estate plan and start thinking about who to designate as your successor trustee, the personal representative in your will, or the agent in your power of attorney. All of these roles are considered fiduciaries.

However, understanding these responsibilities and liabilities is even more important if you are named as a fiduciary. It is also valuable if you are the beneficiary, (or spouse or friend of a beneficiary) and find yourself asking yourself “Is the fiduciary allowed to do that?”

What Are the Rules for Fiduciaries?

The first question you have to ask is, “What does the legal document say you should do?” If there is a legal document such as a trust, will or power of attorney the fiduciary must follow the rules set forth in the documents. Beyond the instructions in the legal document, the following is a list of rules the fiduciary is obligated to uphold.

Duty of Loyalty

When acting as a fiduciary you must act in the best interest of the people that you are serving. For example, the trustee of a trust must act in the best interest of all the beneficiaries. The trustee must treat all beneficiaries equally and not give any special treatment to any of the beneficiaries.

No Self-Dealing

Trustees are usually entitled to reasonable compensation for their services, but he/she cannot get any special benefit or opportunity because of their position as fiduciary. A common example that we see is when the terms of the trust say to distribute all the assets including a house to the beneficiaries, but the trustee is living in the house.While there can be value to having someone care for and manage a property, the fiduciary must consider the fair market value of the property and the care-taking services. If a trustee is living in a house that would normally rent for $1500 a month without paying rent to the trust then this is a personal benefit to the trustee. The trustee may be caring for the property, but does the value of these services off-set the benefit they are receiving as free rent? If not, then this is a self-dealing benefit.

Duty to Safeguard

A fiduciary has a duty to safeguard all of the assets that they are managing. If managing a house or real estate this means making sure that the house is secure and no one else has access to the property. Have you changed the locks? Are you maintaining the property insurance?

The fiduciary will need to review all financial investments to ensure each is properly invested according to the terms of the trust and the needs of the beneficiaries. A fiduciary cannot simply sell all assets and hold them as cash or in a checking account because there is also a duty to act as a prudent investor.

Prudent Investor Rule

A fiduciary has a duty to act as a prudent investor. This means earning a return. A fiduciary that sells all of the stock could face liability, however, a fiduciary that leaves all of the assets in the stock market could also face liability. The “prudent” investor is somewhere in between those two extremes.

What Should You Do?

Acting as a fiduciary comes with a number of legal and ethical obligations. If you don’t understand the legal documents that appoint you with fiduciary responsibility, we strongly encourage hiring legal counsel. An attorney can help you understand what your responsibilities are. You can be sued or otherwise held responsible if you do not uphold your fiduciary duty. Even if just made a mistake or acted out of ignorance. If you are named as a fiduciary call Dana and Associates to schedule a free Family Administration Session. Call us at (480) 924-4424 to schedule today!