What is a fiduciary? The word fiduciary comes from the Latin fiduciarius, which means “hold in trust”, and derives from the Latin word fides, meaning “faith”. It is a legal relationship based on trust where one person, who is in a position of vulnerability, relies on the good faith of another, whose assistance, advice, and protection is sought. Typically, a fiduciary is entrusted to take care of money or other assets for another person.
Fiduciaries include the following:
- Executors who are appointed upon the probate of a Last Will and Testament;
- Administrators who are appointed by the Surrogate’s (or Probate) Court where there is no Will and the assets are to pass by the laws of inheritance;
- Trustees who act either because they are named as trustee under an Inter Vivos Trust, which takes effect during the creator’s life, or are appointed as trustee under a Testamentary Trust in a Will, which takes effect upon the creator’s death;
- Guardians who are in charge of the person or property of another, typically because their ward is a minor or an incapacitated person;
- Corporate directors, who are often viewed as having a fiduciary relationship as well;
- Any relationship where one person is in the position of providing help, guidance, advice, or holding title, on behalf of another who must rely on the integrity and good faith of the other person.
A fiduciary can be a person, as well as a bank, trust company, or other institution. Here, we discuss a fiduciary’s duties and responsibilities:
Fiduciary Responsibility: The fiduciary relationship is considered to impose the highest standard of care and loyalty upon the fiduciary, including a duty of honesty, a duty to work for the best interests of the beneficiaries, and to avoid conflicts of interest and self-dealing.
Investment Standards: The fiduciary is generally considered held to a standard called the “prudent investor rule”. This is usually said to mean taking steps to obtain a reasonable return on the investment while making sure to preserve the principal. Investments, therefore, must be prudent or relatively conservative, meaning that the assets cannot be placed in speculative or risky investments. In addition, investments must take into account both the current and future interests of the people for whom they are held. Needless to say, fiduciaries must pay even more attention to the investments and expenditures under their care than they would for their own personal accounts.
Accountings: Fiduciaries must keep detailed records of all the investments and financial transactions of the assets entrusted to them. Generally, fiduciaries must give an account of this information periodically, as well as at the conclusion of their service. For strict accounting purposes, principal and income are accounted for separately.
Taxes: The fiduciary is responsible to file any tax returns and pay any taxes. Engaging the services of an accountant well versed in fiduciary matters is strongly advised.
Delegation: While fiduciaries cannot, strictly speaking, delegate their responsibilities or decision-making duties, there are two main categories of tasks that fiduciaries can have others assist them with: First, many functions requiring special expertise can be delegated to professionals to give advice and assist with the tasks required. For example, fiduciaries can hire financial advisors when it comes to investments, accountants when it comes to taxes and recordkeeping, and lawyers when it comes to legal issues. However, it is the fiduciary that has to make any discretionary decisions. Second, the fiduciary may delegate “ministerial” tasks — the mundane or routine paperwork or tasks that follow once the fiduciary has determined a course of action or made a decision based on his or her discretion.
Being a fiduciary is a big responsibility, but can also be a gratifying opportunity to provide an important service taking care of aging relatives, widowed spouses, orphaned children, disabled people, or others that need help.