Q:  What is a fiduciary and what do fiduciaries do?

A: A fiduciary is an individual or an entity who serves, by agreement or by court appointment, in place of or on behalf of another. Some common examples of fiduciaries include:

  • Executor or Personal Representative — handles the administration of a decedent’s estate
  • Trustee —  takes title to and administers assets for the benefit of the trust beneficiaries.  A trust can be created by a living person who enters into a written agreement with the trustee that lists the assets transferred into the trust and spells out the provisions of the trust (an “inter vivos” trust) or by a deceased person who spells out the terms of the trust in his or her will (a “testamentary trust”).
  • Guardian – usually an individual, sometimes by profession, who is appointed by a court to assume responsibility for the personal needs, like living arrangements and medical care, for an incapacitated person, called “the ward.”  A guardian can also be appointed to assume the care and custody of a minor child in the event the child has no living parent.
  • Conservator – an individual or an institution appointed by a court to assume responsibility for the management and proper application of the financial assets of a person in need of protection due to some limitation.
  • Agent – one or more individuals appointed by another (known as “the principal”) in a power of attorney to serve in place of the principal.  An agent has all of the powers the principal has  unless limited by the power of attorney.  If provided for in the power of attorney, the agency survives the disability of the principal.  A power of attorney terminates on the death of the principal.

For information, please see J. Robert Smith’s post “Are You A Fiduciary?

Q: What are the duties and responsibilities of a fiduciary?

A:  A fiduciary generally is required to act with the highest standard of care in handling the personal or financial affairs of another person.  The fiduciary may be appointed by the person himself/herself (such as when a principal appoints an agent under a power of attorney), or by a third party (such as when a person creates a trust for persons A and B and appoints Fiduciary C (a person or an institution) to carry out the terms of a written agreement called a “Trust.”

Fiduciaries are required to follow the directions in the governing instrument, such as a will or a trust, but are also governed by the common law as set out in cases decided by the appellate courts and by the state laws enacted by the legislature.  For example, in Colorado, the duties and responsibilities of the personal representative of a decedent’s estate, to the extent not described in the will, are set out in detail in the Colorado Probate Code, while trustees generally look to the common law of Colorado and other states to guide their actions because there are only a few, general laws applicable to the actions of trustees.

Among the most frequently acknowledged duties of a fiduciary are these:

Duty to act – a fiduciary must carry out the instructions s/he/it has been given, as promptly and efficiently as the circumstances require, taking care to act as prudently as possible.  The duty to act requires that the fiduciary take possession of any property that belongs to the estate (or trust) and to safeguard it during administration and before distribution to the beneficiaries.  A fiduciary may need to set a value on the account assets and purchase adequate insurance coverage.

Duties of loyalty and impartiality –  a fiduciary must act with the highest possible standard of fidelity to the beneficiaries for whom s/he or it is acting.  Self interests and other conflicts sometimes trip up a fiduciary who does not have experience and or adequate legal advice.  Unwise decisions resulting from such circumstances are a common cause of removal and surcharge actions.  A fiduciary must put aside favoritism and act on behalf of every beneficiary without regard to personal feelings of affection or animosity.

Duty to Invest Wisely – A fiduciary must act prudently in making investments for the account.  Generally this requires a fiduciary to invest safely and with regard to the interests and needs of the beneficiaries as well as to the purposes of the account and its duration.  A fiduciary is said to have a duty to diversify, which requires that a fiduciary not “put all of the eggs in one basket” so as to balance losses and gains to the extent possible.

Duty to Report – The beneficiaries of an account administered by a fiduciary are entitled to regular periodic reports from the fiduciary about the administration of the account and are entitled to request the opportunity to look at the underlying transactional documents under reasonable circumstances.  Beneficiaries have some responsibility to make reasonable inquiries to protect their own interests.