Cornell University School of Law defines a fiduciary duty as an absolute legal obligation to act in the best interests of another party. Typically, when an individual has a fiduciary duty, that person has an obligation to prudently take care of money or assets on behalf of someone else. With this basic factor stated, there is more that a person needs to understand when it comes to better understanding what is a fiduciary duty?
Highest Legal Standard of Care
In the United States, a fiduciary duty represents the highest legal standard of care. The person with a fiduciary duty must provide extreme loyalty to the individual to whom the duty is owed. There can be no conflict of interest between the person who holds a fiduciary duty and the individual to whom that duty is owed. The fiduciary cannot profit from his or her position.
Parties to a Fiduciary Relationship
There are two primary parties to a relationship in which a fiduciary duty exists. The individual with this high duty is called the fiduciary. The person who benefits from the fiduciary duty is called the beneficiary.
Probate Law and the Fiduciary Duty
Fiduciary duties abound in probate law. There are a variety of relationships in the probate arena that involve a fiduciary relationship.
A prime example of a fiduciary relationship is that between an executor and an estate. An executor is the person designated in a last will and testament to oversee the affairs of an estate after the person who drafted the will in question dies. Similarly, there is a fiduciary duty between an administrator and an estate. An administrator is the person charged with overseeing an estate when there is no will. An administrator is appointed by the probate court.
A fiduciary relationship also exists in a trust situation. A person named as a trustee in a trust agreement has a fiduciary duty to the beneficiaries of a trust.
There is a fiduciary duty underlying a financial power of attorney. In this situation, the person designated to serve as the attorney-in-fact in a power or attorney has a fiduciary duty to the person who created the instrument. The same holds true for a power of attorney for healthcare.
Selecting a Fiduciary
There is likely to come at least one time in your life in which you will be involved in a fiduciary relationship. Specifically, you may seek someone to serve in a fiduciary capacity on your behalf. You may need a fiduciary to serve as the executor of your will, to serve as your agent-in-fact, or to serve as the trustee of a trust you create. (Conversely, there may be a point in your life in which you are asked to serve in a fiduciary capacity as an executor, agent in fact, or trustee.)
If you need to select some one to serve in a fiduciary capacity – for example, as the executor of your will – there are a number of factors to take into consideration. These are factors that are at the foundation of making a wise fiduciary selection. First, you want to select a person who has a reputation for trustworthiness. Indeed, that is the most fundamental characteristic that you will want to identify in a person you select as your executor or for another position that involves a fiduciary duty. In addition to trustworthiness, when you are seeking an executor or other type of fiduciary, you also want to select an individual that is capable and competent as well is diligent and dedicated.
When a Fiduciary Violates the Duty Owed
Unfortunately, there are a surprising number of instances in any given year when a fiduciary violates a duty owed to a beneficiary. There are two more common ways in which a fiduciary breaches a duty owed to a beneficiary. One common way in which a fiduciary violates a duty owed is by failing to diligent tend to the affairs of the beneficiary. The second common way in which a fiduciary breaches a duty owed is by self-dealing or even misappropriating or misusing assets under his or her control. Again, the assets under the control of a fiduciary are to be utilized for the beneficiary. Although a fiduciary can be paid for his or her services, a person in this position cannot otherwise benefit from his or her legal status.
If a fiduciary breaches the duty owed, the beneficiary can take legal action for losses sustained. In addition, the laws in most states, including California, permit a beneficiary to seek additional damages beyond actual losses if a fiduciary violates his or her duty. This represents additional compensation paid to a beneficiary as a result of the breach of a fiduciary duty. There are times when a breach of a fiduciary duty can result in a fiduciary being charged with a crime like theft.