Entrusted: Understanding the Critical Role of a Fiduciary

As an experienced lawyer, I’ve seen firsthand how crucial certain relationships of trust are in our legal and financial systems. At the heart of many of these relationships is the concept of a “fiduciary.” But what is a fiduciary, exactly? And what does it mean to have a “fiduciary duty”? This isn’t just legal jargon; it’s a fundamental principle that protects individuals in vulnerable positions. Understanding what a fiduciary is can empower you to recognize when you’re owed such a duty or when you might be acting in that capacity yourself.

Simply put, a fiduciary is an individual or entity that has the legal and ethical obligation to act in the best interests of another person or party, known as the principal or beneficiary. This relationship is built on a foundation of trust, confidence, and good faith. The fiduciary must set aside their personal interests and prioritize the well-being of the person they are serving.

Let’s explore how a fiduciary duty works in some common contexts:

When a trust is created, a trustee is appointed to manage the trust assets for the benefit of the beneficiaries. This is a classic fiduciary relationship.

What is a fiduciary trustee? A trustee is a quintessential fiduciary, legally bound to manage the trust’s assets – whether money, property, or investments – strictly according to the terms of the trust document and solely for the benefit of the named beneficiaries.

Duties Owed:

• Following The Trust Instrument: Above all else, the trustee must follow all legal directions of the trust instrument.
• Loyalty: The trustee cannot profit from their position (beyond agreed-upon compensation), favor one beneficiary over another (unless the trust instrument dictates), or engage in self-dealing (e.g., selling trust property to themselves at a low price, again, unless the trust instrument says so).
• Prudence: They must invest and manage trust assets prudently, often following guidelines like the “Prudent Investor Rule,” which emphasizes diversification and risk management appropriate for the trust’s purpose and the beneficiaries’ needs – sometimes the trust instrument may direct the trustee on how or how not to invest or manage trust assets.
• Impartiality: If there are multiple beneficiaries (e.g., an income beneficiary and a remainder beneficiary who will inherit later), the trustee must treat them impartially, balancing their respective interests – again, always following the trust instrument.
• Disclosure and Accounting: Trustees must keep beneficiaries reasonably informed about the trust’s administration and provide regular accountings of income, expenses, and assets. Sometimes the frequency of accounting is controlled by statute.

A trustee also owes various other duties that may be imposed by statute or caselaw, depending upon the state. Failure to uphold any of these duties could lead to personal liability for the trustee, a finding for damages, and/or potential removal by a court.

When someone passes away, their estate (assets and liabilities) must be managed and distributed. The person appointed to do this, typically named in the will, is the executor (or personal representative/administrator if there’s no will or the named executor cannot serve).

What is a fiduciary executor? An executor is a fiduciary tasked with winding up the decedent’s affairs. They owe their duties to the estate’s creditors and, ultimately, to the beneficiaries or heirs who will inherit the assets.

Duties Owed:

• Gathering and Protecting Assets: The executor must identify, locate, and secure all the deceased person’s assets.
• Paying Debts and Taxes: They are responsible for paying valid debts, funeral expenses, and any taxes owed by the estate.
• Loyalty and Impartiality: The executor must follow the instructions of the Will, act in the best interest of the estate and its beneficiaries as a whole, not favoring one beneficiary over another (unless the Will says so) or their own interests.
• Inventory: They must keep records of all transactions and provide an inventory to the beneficiaries and the court as required.
• Distribution: After all debts and expenses are paid, the executor distributes the remaining assets to the beneficiaries according to the terms of the will (or state intestacy laws if there’s no will).

An executor’s role is temporary but carries significant fiduciary responsibility. Mismanagement or self-dealing can result in serious legal consequences.

Corporate directors are elected by shareholders to oversee the management of a corporation. This position comes with significant fiduciary responsibilities owed to the corporation and its shareholders.

What is a fiduciary corporate director? A corporate director is a fiduciary entrusted with making decisions that affect the corporation’s well-being and, consequently, the value of the shareholders’ investments.

Duties Owed:

• Duty of Care: Directors must be informed and act with the care an ordinarily prudent person would exercise in a similar position. This involves attending meetings, reviewing materials, asking questions, and making decisions they reasonably believe are in the corporation’s best interests. The “business judgment rule” often protects directors from liability for honest mistakes if they meet this duty.
• Duty of Loyalty: Directors must prioritize the corporation’s and shareholders’ interests over their personal interests. This prohibits self-dealing (transactions between the director and the corporation that aren’t fair to the corporation), usurping corporate opportunities (taking a business opportunity for themselves that should have belonged to the corporation), and other conflicts of interest.
• Duty of Good Faith: This requires directors to act honestly and with a sincere belief that their actions are in the best interests of the corporation. It prohibits intentional misconduct or a knowing violation of the law.

Breaches of these duties by directors can lead to shareholder lawsuits (derivative suits) seeking damages for the corporation or other remedies.

The concept of fiduciary duty isn’t limited to these three examples. It arises in many other situations where one party places significant trust and confidence in another, including:

• Attorneys and Clients: Lawyers have a profound fiduciary duty to act in their clients’ best interests, maintain confidentiality, avoid conflicts of interest, and provide competent representation.
• Financial Advisors and Clients: Certain financial advisors (especially those registered as Investment Advisors) are fiduciaries and must provide advice that is in their clients’ best financial interests, disclosing any potential conflicts.
• Real Estate Agents and Clients: Real estate agents typically owe fiduciary duties to their clients (the buyer or seller they represent), including loyalty, confidentiality, and disclosure.
• Guardians and Wards: A legal guardian appointed for a minor or an incapacitated adult is a fiduciary, responsible for the ward’s personal and/or financial well-being.
• Partners in a Business: Business partners often owe fiduciary duties to each other, requiring them to act in good faith and with loyalty towards the partnership.

Knowing “what is a fiduciary” and understanding “fiduciary duties” is essential because these principles underpin many of our most important personal and financial dealings. When you entrust someone with your assets, your legal rights, or the governance of a company you’ve invested in, you have a right to expect they will act with unwavering loyalty and care.

If you believe a fiduciary has breached their duties, leading to harm or loss, it’s crucial to seek legal counsel. Conversely, if you are asked to serve as a fiduciary – perhaps as a trustee, executor, or board member – it’s vital to understand the gravity of these responsibilities and to act diligently and ethically at all times.

The law imposes these high standards on fiduciaries for a simple reason: to protect those who place their trust in others and to ensure fairness and integrity in relationships where one party holds a position of power or influence over another’s affairs.