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What is a Fiduciary

Look. We all know that fiduciary is probably the most fun word in the world to say. What you may not know is what a fiduciary is or what their responsibilities are.


In short, a fiduciary is a person who manages assets for another person. Alternatively, an organization may also be a fiduciary.


Along with the ability to manage assets for another person there are certain responsibilities. First and foremost, a fiduciary has the responsibility to act for the benefit of the beneficiary, or the person whose assets the fiduciary manages.





We call these responsibilities, fiduciary duties. The two most important fiduciary duties are the duty of care and the duty of loyalty. If a fiduciary breaches her duties she must account for the breach and the beneficiaries will likely be entitled to damages as a result.


The most common fiduciary relationship is formed when one person manages another person's finances. For example; financial advisors, bankers, and accountants all owe fiduciary duties to their customers.


Common fiduciary relationships include the relationships between;

  • Trustee and Beneficiary

  • Corporate Board Members and Shareholders

  • Executors and Beneficiary

  • Guardians and Wards

  • Lawyers and Clients

  • Investment Corporations and Investors

Of these we will briefly discuss the relationship between trustee and beneficiary, corporate board members and shareholders, and executors and beneficiaries.


Trustee and Beneficiary


Trusts involve the trustee, or the person who manages the estate, and the beneficiaries. The trust has a fiduciary duty to the beneficiaries. For more about trusts, click here.


A trustee has the legal ownership of the property and assets held in a trust and the power to manage those assets. With this power the trustee also has fiduciary duties to the beneficiaries of the trust.


A trustee owes the duty of loyalty, prudence, and subsidiary duties to the beneficiaries of the trust.


Some examples of what the fiduciary relationship between trustee and beneficiary requires are the responsibility to; act impartially (no favorites among the beneficiaries), refrain from commingling trust property with the trustees private property, and the duty to inform and account to beneficiaries.


The trustee must consider the best interests of the beneficiary in all decisions made while acting as a trustee.





Executor and Beneficiary


Executors, or the personal representative named in a will, also owe fiduciary duties to the beneficiaries of a will. For more on wills, click here.


These duties primarily require the representative to distribute the assets of the will and pay off any debts.


The responsibilities of an executor are similar to those of a trustee, except the executor is usually responsible for distributing the will, not managing it, and a trustee will typically both manage and distribute a trust.


Corporate Board Members and Shareholders


Directors of corporations are also required to uphold fiduciary duties, these include; the duty of care, the duty of loyalty, the duty of good faith, the duty of confidentiality, the duty of prudence, and the duty of disclosure.


Additionally, members and managers of LLCs owe similar duties of loyalty to the LLC itself. Again the two primary duties here are loyalty and care.


 

Being a fiduciary is a big responsibility and requires you to prudently manage the financial affairs of another. Please contact Hometown Law if you enter a fiduciary relationship and need legal guidance on your new responsibilities or if you feel your fiduciary has breached her duties.





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