What is a Fiduciary?

You may have heard the term “fiduciary” used in connection with the role of executor, administrator, or personal representative of a person’s estate or the trustee of a trust.  Most people are unclear about what exactly it means to be a “fiduciary.”  And because the term is based on somewhat elusive common law theories of equity, the details of a person’s fiduciary duty in a given situation can be difficult to define.

So what is a “fiduciary?”  Black’s Law Dictionary perhaps defines the term best: “A person having duties involving good faith, trust, special confidence, and candor towards another.”  The concept of the fiduciary and the relating obligations have been developed to address a basic concern:  In many situations, we want to prevent persons with discretionary power over the interest of others from abusing that power to improperly benefit them.  Fiduciary duties are imposed to protect the weaker party against abuse of the fiduciary relationship.

Fiduciary duties involve the twin obligations of the duty of loyalty and the duty of care.  The duty of loyalty obligates the fiduciary to put the needs of the beneficiaries ahead of its own self-interest.  The fiduciary is not to exploit the fiduciary relationship for its own benefit.  The duty of loyalty is the basis of several more specific duties, such as the prohibition against self-dealing, the duty to disclose material facts, and duties involving conflicts of interest.

The second fiduciary duty—the duty of care—requires a fiduciary to carry out its responsibilities in an informed, prudent manner and to act as an ordinary prudent person would act in the management of his or her own affairs.

Executors, administrators, trustees, and personal representatives are all fiduciaries, meaning that they are subject to the fiduciary duties of loyalty and care.  They must recognize that they hold assets for the benefit of the beneficiaries (and, in some circumstances, creditors) and should not treat them as their own.

Fiduciary duties can be more complicated when the fiduciary is also one of the beneficiaries.  In that situation, fiduciaries should be sure that they act in the interest of the other beneficiaries involved and not simply in their own interest as a beneficiary.

As a practical matter, many concerns regarding fiduciary responsibilities can be resolved by obtaining the consent of all individuals with an interest in the transaction. For example, if a trustee needs to sell a trust asset, he can protect himself against claims for breach of fiduciary duty by providing the beneficiaries with full disclosure of the terms of and reasons for the sale and obtaining informed consent prior to the sale.  By obtaining the consent of all parties involved, the fiduciary can minimize the potential for an abuse of fiduciary duty claim.