A fiduciary is a person designated to act on behalf of another person. They are generally tasked with being responsible for finances, as well as decision making. This could be many different people, but it generally applies to the executor or administrator of an estate. A fiduciary may also be the person in charge of executing a person’s will.
Some other examples of a fiduciary would be groups of people, such as:
- Money managers;
- Financial advisors;
- Insurance agents;
- Board members; and
- Corporate officers.
A fiduciary bond is a type of judicial bond that is imposed on a fiduciary. Essentially, the court requires the fiduciary to deposit a certain monetary amount with the court. This amount will act as a sort of insurance in order to ensure that the fiduciary performs their fiduciary tasks and responsibilities. The fiduciary bond is often utilized to help prevent instances of fraud, theft, or embezzlement of the estate holder’s property and money.
Fiduciary bonds may be called by different names depending on the context. Some examples of these different terms can include:
- Probate bonds;
- Executor bonds;
- Administrator bonds;
- Conservatorship bonds; and
- Guardianship bonds, among others.
Who Are Fiduciary Bonds Applied To? What if the Fiduciary Violates Their Duties?
Fiduciary bonds are applied to any person or party acting in a fiduciary capacity. To put it simply, any person that has a fiduciary duty or responsibility to another person could become subject to a court-order fiduciary bond.
As previously mentioned, such people may include:
- Estate executors or administrators;
- Financial advisors;
- Legal guardians; and/or
- Lawyers and other professionals.
The specific definition of a fiduciary can vary from jurisdiction to jurisdiction. Generally speaking, the test used in order to determine whether or not a person is a fiduciary analyzes the amount of control the person has. If the financial representative exercises a great deal of control and decision-making over another person’s finances, they will likely be considered as a legal fiduciary of that other person.
It may happen that a fiduciary violates their legal and financial duties as the other person’s agent. That is the main purpose of a fiduciary bond; to help encourage a fiduciary to adhere to the law, as well as the terms of any financial contract existing between the parties.
Some examples of the most common types of fiduciary violations may include:
- Stealing or embezzling funds;
- Unlawfully gaining access to accounts or personal information through means of fraud or misrepresentation;
- Purposefully giving the person bad advice in order to lead them into a certain decision;
- Coercing the person to make decisions through physical harm or threats of physical harm; and/or
- Making alterations or serious errors in an account report.
While a fiduciary bond cannot always prevent every single violation, these bonds can be very useful in terms of providing general protection against losses. Should a violation occur, the fiduciary may need to pay a damages award for the economic losses caused to the person.
What Are the Basic Types of Fiduciary Duties?
One of the most important fiduciary duties is the obligation to act for the beneficiary’s benefit, not the benefit of the fiduciary. Fiduciary duties can be categorized in three ways:
- Duty of Care: A fiduciary is expected to use the same amount of care that any ordinarily prudent person would exercise in a similar position, and under similar circumstances. An example of this would be a fiduciary’s duty to treat the property or money that they are trusted to manage and protect as their own. The fiduciary must make prudent decisions regarding the best ways to manage and protect the assets they are entrusted with;
- Duty of Good Faith: The fiduciary is tasked with the duty of acting with conscious regard for their responsibilities as a fiduciary. What this means if that the fiduciary must not act in any fraudulent or deceitful way, to the detriment of the beneficiary; and
- Duty of Loyalty: A fiduciary’s duty of loyalty is vast. In short, the fiduciary must act for the benefit and advantage of the beneficiary, without making any decisions that would be disadvantageous for the beneficiary. A fiduciary may not make any decisions on behalf of the beneficiary that are out of self interest, or for their own benefit.
The above mentioned duties are mostly imposed by public policy when a specialized service is involved, such as money management, legal help, or medical care. Most fiduciary relationships occur in a legal context, such as when wills, contracts, and trusts are involved.
What Is a Fiduciary Duty of Loyalty? What Can Be Done About a Breach of the Duty of Loyalty?
As previously mentioned, one of the most important fiduciary duties is the duty of loyalty. Fiduciaries are expected to act in good faith, as well as with all of the fairness, morality, and honesty that the law requires of their position. They must not be involved in any self dealing transactions, conflicts of interest, or any other abuses of the principal for any personal advantage.
When making any transactions or decisions, it is imperative that the fiduciary avoid the following breaches of duty:
- Misappropriating Business Opportunities: When a fiduciary manages and protects property and/or money on behalf of a beneficiary for business purposes, they must not seize a business opportunity while acting within the scope of their fiduciary duties. To put it more simply, they must not seize the business opportunity for their own benefit. The fiduciary has an obligation to disclose and offer the business opportunity to the beneficiary, when that opportunity clearly belongs to the beneficiary;
- Make Interested Transactions: Fiduciaries entrusted with a beneficiary’s property and money have a duty to protect and manage the property on behalf of the beneficiary. Because of this, they must not make interested transactions utilizing the property entrusted to them. An example of this would be how a fiduciary may not buy or sell assets, make any type of personal profit, or make any type of self-dealing transactions using the money or property entrusted to them; and
- Breaking Their Duty of Confidentiality: Additionally, a duty of loyalty requires that a fiduciary maintains confidentiality regarding all decisions and private information with which they have been entrusted. A beneficiary may not wish for public disclosure of their private matters. This means that the fiduciary would be prohibited from disclosing information about the beneficiary’s property or transactions. They must first obtain permission to disclose.
Breaches generally occur when the fiduciary acts in any way that benefits themselves as opposed to the beneficiary, or to the detriment of the beneficiary. A breach could also include the fiduciary acting in such a way that benefits others at the expense of the beneficiary. Fraudulent conduct also constitutes a breach of the duty of loyalty, and the fiduciary may be prosecuted for the violation as well as the underlying offense.
In order to recover damages for a breach, the claimant must show that:
- The fiduciary occupied a position of trust, or was placed in a fiduciary relationship;
- The fiduciary acted in a manner that benefited them personally while in the scope of the fiduciary relationship;
- Proof that the duty of loyalty was, in fact, owed;
- The duty was breached by the fiduciary;
- The breach caused damages to the claimant; and
- What exact damages occurred.
If a civil claim is brought by the claimant against the fiduciary, the claimant could receive damages for any lost profit. They may also receive restitution in order to recover profits that the fiduciary gained to the detriment of the beneficiary. It may be possible for the claimant to recover profits that were gained by the fiduciary, even if the claimant themselves did not actually suffer any type of harm.
Do I Need a Lawyer for Help With Fiduciary Bond Issues?
Because the state and local laws covering fiduciary bonds may be different in each jurisdiction, you may wish to consult with a local estate lawyer if you need help with a fiduciary bond. A skilled and knowledgeable local attorney will be best suited to advise you regarding local laws and how they may affect your case. An experienced and local estate attorney can also assist in resolving any fiduciary bond issues you may be encountering, as well as represent you in court as needed.