A fiduciary is a person or entity appointed to manage assets or property, such as a trust or an estate, on behalf of another party known as the beneficiary.
The fiduciary’s role is governed by fiduciary duties, which are legal obligations requiring the fiduciary to act in the best interests of the beneficiary and to exercise care, loyalty, and prudence when managing the trust or estate.
General fiduciary duties
State laws define the specific requirements for fiduciaries, but many fiduciary duties are rooted in long-standing legal principles and can be summarized through several common concepts. Although the examples below refer to a trustee, these duties generally apply to all fiduciaries, including executors, agents under a power of attorney, and guardians.
- Duty of loyalty
The trustee must act solely in the best interests of the beneficiary and avoid conflicts of interest. A trustee should not use their position for personal gain or engage in transactions that compromise the beneficiary’s interests.
- Duty of care
The trustee must exercise reasonable care, skill, and diligence when managing trust assets. This includes making informed decisions, staying aware of the trust’s financial condition, and seeking professional advice when appropriate. The trustee should act prudently while considering the needs of the beneficiaries and the circumstances of the trust.
- Duty to follow trust terms
The trustee must follow the instructions and provisions contained in the trust document. This includes understanding and carrying out the wishes of the person who created the trust, often called the settlor or grantor.
- Duty to act impartially
If a trust has multiple beneficiaries, the trustee must treat all beneficiaries fairly and consider their respective interests. The trustee should avoid favoritism or giving preference to one beneficiary over another, especially if the trustee is also a beneficiary.
- Duty to account
The trustee must maintain accurate records of all trust activities, including income, expenses, investments, and distributions. Trustees are typically required to provide periodic reports to beneficiaries so they can review how the trust is being managed. Depending on state law, this duty may be strict and detailed or may be limited or waived by the person who created the trust.
- Duty of confidentiality
The trustee must keep the trust’s affairs confidential and exercise discretion when handling sensitive information. Personal or financial information about the trust or its beneficiaries should not be disclosed unless required by law or authorized by the trust document.
- Duty to preserve and protect trust property
The trustee is responsible for safeguarding the trust’s assets and preserving their value. This may include making prudent investment decisions, maintaining appropriate insurance coverage, and taking reasonable steps to prevent loss or damage to trust property.
- Duty to invest assets prudently
A trustee must invest trust assets responsibly and in accordance with prudent investment standards. This generally involves considering risk and return, diversifying investments where appropriate, and periodically reviewing and adjusting the investment strategy to reflect changing circumstances.
- Duty to delegate prudently
A trustee may delegate certain tasks to professionals or agents when appropriate. However, the trustee must exercise care in selecting those agents and must provide reasonable supervision. The trustee remains ultimately responsible for the actions taken on behalf of the trust.
Potential consequences if a fiduciary acts inappropriately
Fiduciary duties exist to ensure that trustees and other fiduciaries act responsibly and in the best interests of beneficiaries. When a fiduciary violates these duties, serious legal consequences may follow.
- Removal of the fiduciary
Beneficiaries or a court may seek removal of a fiduciary who has breached their duties. If the breach is significant or ongoing, the court may determine that the fiduciary is no longer fit to serve and may appoint a replacement.
- Surcharge or financial liability
A fiduciary who breaches their duties may be held personally responsible for financial losses suffered by the trust or beneficiaries. The court may require the fiduciary to repay misused funds, compensate for losses, or restore the trust to the position it would have been in if the breach had not occurred.
- Voiding of transactions
If a fiduciary engages in self-dealing or transactions that violate the duty of loyalty, those transactions may be declared invalid. The fiduciary may be required to reverse the transaction or compensate the trust for resulting losses.
- Legal remedies and lawsuits
Beneficiaries or other interested parties may bring legal action against a fiduciary for breach of duty. This can lead to litigation, court orders, financial damages, or other legal remedies.
- Criminal or civil penalties
In cases involving fraud, embezzlement, or other illegal conduct, a fiduciary may face criminal charges or civil penalties. These penalties may include fines, restitution, or imprisonment.
- Professional consequences
If the fiduciary is a professional such as a lawyer, accountant, or financial advisor, a breach of fiduciary duty may also lead to professional discipline, loss of licenses, or damage to professional reputation.
The consequences of a breach of fiduciary duty depend on the circumstances. If a fiduciary makes a mistake while acting in good faith, they may face liability for negligence. However, if the fiduciary acts intentionally or recklessly and causes harm to beneficiaries, the consequences may be more severe. Specific outcomes can vary depending on the jurisdiction, the nature of the breach, and the applicable laws.