Fiduciary Duties

Estate Planning AttorneyIntroduction It is essential that the scope of fiduciary duties be understood as it pertains to individuals who have been appointed to act as a Trustee. The role of fiduciary has an old and valued place in our society and refers to a relationship that is based on loyalty and confidence. Those who traditionally serve in a fiduciary capacity include trustees, personal representatives, guardians, and conservators. Accountants, auditors, investment advisors and bankers can also have fiduciary duties, depending on the nature of their activities. The finding of a fiduciary relationship can have dramatic legal consequences. Where litigation is involved, expert testimony may not be required to establish a breach of fiduciary duty as it is necessary to prove breach of the standard of care for negligence. Additionally, the establishment of a fiduciary duty shifts the burden of proof to the fiduciary to prove not only that the fiduciary fulfilled his or her duties but that their conduct was above reproach. The defenses of comparative or contributory negligence are not available to the defendant/fiduciary because breach of fiduciary duty is not grounded in negligence. Extraordinary remedies are available for breach of fiduciary duty that includes disgorgement of fees and profits as well as removal of the fiduciary. Additionally, the beneficiary need not prove causation of damages where the beneficiary seeks disgorgement of fees, profits, etc. Fiduciary duty may arise in a variety of ways. In the relationship between the parties, only the fiduciary has the duty with respect to the beneficiary and to certain property. This duty has a specific scope and entails certain obligations until the duty is either discharged or breached. Where the duty is breached, the law will generally impose a remedy on the fiduciary in favor of the beneficiary(ies). Four fundamental obligations constitute fiduciary duty. They are: The duty of management; The duty of loyalty or preference; The duty to account; and The duty to disclose.  

Duty of Management

The first and fundamental obligation of the fiduciary is to use reasonable care to deal prudently and competently with the property so as to preserve it for the beneficiaries. This is the duty of management and is well understood by any party that contracts with another. The fiduciary must make absolutely certain that the fundamental duty of proper management is discharged. Failure to discharge this duty defeats the whole purpose of the fiduciary’s duty. The purpose of having a fiduciary in the first place is to enlist his skill in the management of the trust’s property. This duty may be breached negligently or intentionally, though more often breach of the duty of management is negligent rather than intentional. While this duty is fundamental, it is the least psychological of all the fiduciary duties and often receives the least attention. A fiduciary must exercise reasonable care and prudence in the discharge of his management duties. Even if a trustee is given discretion, the exercise of duty must be without caprice or arbitrariness and in the exercise of the trustee’s best judgment. The exercise of the trustee’s discretion is reviewable for bad faith and for gross neglect. A fiduciary must be zealous to preserve and protect the trust property. Thus, there is a duty of loyalty within the management arena. It involves constancy and persistence in protecting the trust property. A trustee is required to use reasonable and prudent efforts.   A professional trustee, however, is held to the higher standard of “best efforts.” The court will not second guess the fiduciary if the fiduciary makes decisions which, at the time made, were reasonable and in good faith. The mere fact that another decision would have been better will not render the fiduciary liable. The duty of management can be limited in three ways: By the terms of the instrument; By agreement between the fiduciary and the beneficiaries; and By court decree.  

Duty of Loyalty

The second fundamental obligation of a fiduciary is to set the beneficiary’s interests ahead of the interests of any other party (including his/her own) in dealing with the fiduciary assets. This translates to the duty of loyalty or the duty of preference. This involves the duty to abstain from taking any advantage of the beneficiary in any dealings with the trust. The duty to set the interests of the beneficiary ahead of third parties translates into the duty to defend the trust and to remain loyal to it. In a trust situation, the fiduciary is referred to as trustee and is under a duty to follow the directives in the governing instrument. The trustee must be absolutely loyal to the trust, must act solely in the interest of the trust, and any behavior on the part of the fiduciary that compromises the fiduciary entity is subject to judicial sanction. The fiduciary can take no benefit from ownership of trust assets, nor deal with them for personal profit or for any purpose unconnected with the trust, or otherwise detrimental to the beneficiary.

Duty to Account

The third fundamental obligation of a fiduciary is the duty to account and is more focused than the duty of disclosure. This is the duty to provide relevant information to the beneficiaries. The duty stems from the fact that the fiduciary does not really own the property, but holds it for the benefit of the beneficiary. Therefore, the fiduciary is obligated to keep records of all transactions affecting the trust and make them available to the beneficiary either on request or at a scheduled time. It is an affirmative duty and requires that the fiduciary do more than merely be “honest”. Rather, the fiduciary must keep records that prove honesty. This includes separating the fiduciary assets and not commingling them with the fiduciary’s personal property. If the fiduciary does not render proper reports, he has not fulfilled his whole duty. His silence can create concern in the beneficiary regarding the condition of the property and this itself is a breach of fiduciary duty. The accounting rendered by the fiduciary must be complete and must cover all transactions from the beginning of the relationship to the end, or for a shorter interim period. It is not the beneficiary’s job to ferret out the facts and figures or to discover any deficiencies in the fiduciary’s accounts. The fiduciary’s duty to account periodically is an ongoing and continuous obligation. Sending the beneficiary copies of checks and other evidences of receipts and disbursements as they occur does not constitute a proper accounting. The timing of a rendering of an accounting can be:   Regular in nature; On demand by the beneficiary; Interim or final; or On the termination of the fiduciary relationship. Many state statutes now require the rendering of an accounting on an annual basis to the beneficiaries of a trust. Additionally, state law may allow for the beneficiaries to waive their rights to an accounting on a periodic basis. Sometimes the governing instrument itself waives the requirement of an accounting. In these cases some states have rendered this direction by the settlor to be null and void only allowing the beneficiaries to waive the requirement of an accounting.   Duty to Disclose (to Beneficiaries) The final fundamental obligation of a fiduciary is an extension of the duty to account and is the duty to disclose. This duty runs to all information – not just financial information – and cannot be delegated in the way that the duty to account can be. The fiduciary has a general duty to disclose to the beneficiary all material facts concerning the administration of the trust. This involves not only transactions that have occurred and would be part of the accounting provided to the beneficiaries, but also involves transactions that might take place in the future. The beneficiary has a right to make decisions and to act in reliance on the information he receives from the fiduciary. If the beneficiary can prove that his or her actions would have been different if the fiduciary had disclosed more than he did disclose, then an action will lie for breach of this duty. Both the duty to account and duty to disclose provide protections to the fiduciary when the duties are carried out properly. Proper accounting and disclosure can, in some states, serve to limit the duration of the statute of limitations for bringing an action for breach of trust against the fiduciary. All of the above may seem daunting when you realize the fiduciary duties that are attached with serving as a Trustee. At TLD Law, we routinely assist clients through the trust administration process and work diligently to work with Trustees throughout the trust administration process and protect fiduciaries from liability. Author – Monica Goel, Esq. A Certified Specialist in Estate Planning, Trusts, and Probate

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