What Constitutes a Breach of Fiduciary Duty?

Key Takeaways

• A fiduciary duty is a legal obligation that one party has to another to act in their best interests.
• A breach of fiduciary duty is when an individual fails to uphold their responsibilities in their role, either due to negligence or willful misconduct.
• To qualify as a breach of fiduciary duty, an incident must include a material breach, specific damages, and have a clear and intentional cause.
• If you suspect breach of fiduciary duty or you have been wrongfully accused, you should contact an attorney as soon as possible to take legal action.

Introduction

When a professional serves in a fiduciary role they have a responsibility to do the best possible job for the client they are representing—this is an important aspect of any client-professional relationship, whether it’s an attorney supporting a client or a trustee overseeing an estate.

If this fiduciary duty is not taken seriously in estate or trust administration, it could harm the administration process, compromise the rights of the beneficiaries, and counteract the wishes of the will creator.

It’s important to understand what elements may exist to determine whether you are experiencing a scenario that truly constitutes a breach of fiduciary duty. This guide outlines the criteria that constitute a breach of fiduciary duty in trust and estate administration and how you should navigate the process if an incident occurs.

What Is a Fiduciary Duty?

A fiduciary duty is the legal responsibility of one person to act in the best interests of another in a contractual relationship. This is most relevant when a person is responsible for managing another’s finances, property, or other assets. There are several types of fiduciary relationships, such as lawyer to client or trustee to beneficiary. 

There are three components to a fiduciary duty:

• Duty of care – A fiduciary must be thoughtful and careful in their decision-making and management of the estate, making responsible financial decisions.
• Duty of loyalty – A fiduciary must act solely in the best interest of the estate, and avoid self-dealing for personal gain or undermining the estate to favor other parties.
• Duty of impartiality – A fiduciary must act fairly in their administration of an estate, remaining unbiased toward beneficiaries.

All together, under this duty, a professional is obligated to make good, mindful decisions regarding the assets—this means avoiding irresponsible investments, remaining transparent in the process, and maintaining careful professionalism and fairness while handling all assets.

Fiduciary duty is a quintessential part of the trust and estate administration processes. This agreement allows beneficiaries to maintain confidence that the assets of a loved one’s estate will be handled responsibly and in alignment with the deceased person’s wishes.

What Is a Breach of Fiduciary Duty?

A breach of fiduciary duty is an act where a professional fails to uphold their responsibilities to act in the best interests of an estate. This may include acting with negligence or outright malicious intent while carrying out their responsibilities.

It’s important to note that a breach of fiduciary duty does not define a single action—instead, there are a variety of possible acts that may fall into the category. A breach of fiduciary duty can be any act of wrongdoing ranging from negligence in one’s role to theft.

A breach of fiduciary duty can come with harsh consequences, from the removal of the fiduciary from their role to having to repay damages to the estate. However, it’s important to understand what elements constitute a breach of fiduciary duty so that you can take the appropriate next steps to protect the estate and its interests.

What Are the Elements of a Breach of Fiduciary Duty?

To constitute a breach of fiduciary duty, a case must meet the following criteria demonstrating these three components. 

A Material Breach of Duty

First, there must be a clear act that reflects a breach of fiduciary duty. This is the action that the accusing party can point to as a demonstration of the wrongful acts, which may include an act of malicious wrongdoing or clear negligence. 

For example, an act of embezzlement of estate assets or a false claim to a beneficiary both serve as material breaches of one’s fiduciary duty. In most cases, along with a material act that constitutes a breach of fiduciary duty is an action that involves clear intent or negligence that a reasonable person could have avoided through their actions.

Damages

To constitute a breach of fiduciary duty, an act must have resulted in tangible damages, such as a loss of property or financial value in an estate. The beneficiaries or interested party bringing forth a breach of fiduciary duty lawsuit will cite these damages as the desired restitution for the act of wrongdoing. 

Circumstances that may represent tangible damages include: 

• Financial losses to the estate
• Avoidable and unnecessary fees levied against an estate
• Reduced financial value of estate assets

In many cases where a representative is found personally liable, the court will require that the personal representative responsible for these damages is to pay these damages back to the estate to recuperate the unnecessary losses. This requirement is covered in California Probate Code §16420 and offers affected beneficiaries an opportunity for restitution. 

Cause

Any observed damages must be proven to have been caused by the fiduciary’s actions. In this case, the burden of proof is on the side claiming that there has been a breach of fiduciary duty and that it resulted in damages. 

Take, for example, a case if a beneficiary of an estate believes that an executor failed to uphold their duty by making an irresponsible investment and that it led to a financial loss for the estate. The beneficiary would have to establish proof of a link between the executor’s actions and the resulting losses.

Examples of a Breach of Fiduciary Duty

Because breach of fiduciary duty is an overarching concept, there are many actions that can fall under the umbrella of the term. A breach of fiduciary duty can encompass any action that involved a clear and irresponsible act of executor misconduct that led to tangible damages to an estate. 

Common examples of executor misconduct that serve as breach of fiduciary duty include:

• Misappropriation of estate assets
• Self-dealing 
• Negligence in managing estate or trust assets
• Irresponsible record keeping or accounting
• Failure to follow the terms of a will or trust instrument
• Failing to distribute estate or trust assets

An individual can often avoid a breach of fiduciary duty by being fully aware of their responsibilities and maintaining close communication with all interested parties in the estate.

What To Do in a Breach of Fiduciary Duty Case

When raising a breach of fiduciary duty claim, you may either pursue litigation, mediation, or arbitration, depending on the nature of the actions and the willingness of the representative to cooperate.

Mediation is a valuable option for settling disputes outside of court, allowing both sides to come to a compromise that allows everyone to move forward confidently. For example, if a trustee acknowledges that they acted irresponsibly using trust investments, they may agree to refund the trust for its losses using their own personal funds.

In cases where this level of cooperation or a compromise is unlikely, one side may choose to pursue litigation. 

In any case if you believe the personal representative in your case has breached their fiduciary duty, you should take the following steps:

• Consult an attorney 
• Gather evidence of the breach of duty
• File your case with the probate court
• Build your case with your attorney

Above all else, it’s important to raise your claim as soon as possible. In California and Texas, the statute of limitations for a breach of fiduciary duty is 3 years. However, it can take time to find the right lawyer, gather evidence, and file with the court, meaning time is the greatest asset you have.

Possible Outcomes of a Breach of Fiduciary Duty Case

Proving breach of fiduciary duty during estate administration can result in several potential outcomes. If the court verifies that there was a breach of fiduciary duty, some of the possible outcomes may include:

• A court order requiring the personal representative to act
• Payment of damages from the trustee or personal representative
• Removal of the professional from their role and replacement by a successor or third party private professional fiduciary

The court may also order that the fiduciary is liable for any damages resulting from a breach in their duty under California Probate Code §16440. This law ensures that beneficiaries are able to pursue restitution for any potential damages they’ve experienced. 

A trust or probate litigation attorney can support you in your case by acting as a third-party mediator or by helping you build a strong case in litigation. 

How To Avoid a Breach of Fiduciary Duty

Although there are some acts of misconduct from bad actors that you cannot prevent, there are steps that beneficiaries and representatives alike can take to protect an estate. Interested parties may consider several proactive approaches to prevent an estate from becoming vulnerable to a breach of duty.

The following steps can create an environment that makes a breach of fiduciary duty less likely to occur:

• Maintaining clear communication between interested parties
• Keeping accurate records of all decisions and transactions
• Seeking professional advice from attorneys and financial advisors
• Ensuring estate plans and trusts are reviewed and updated prior to one’s passing 

Common instances of a breach of fiduciary simply occur because of a failure to understand one’s legal obligations. Professional advice can help minimize this risk. 

If you are a personal representative of an estate, consulting a skilled probate and estate administration attorney can help you understand the full scope of your duties so that you can enact them responsibly.

If you are a beneficiary, you can also hold your trustee or executor accountable by requesting regular communications and accountings of estate transactions.

Case Scenario: Breaching Fiduciary Duty in Estate Administration

The following scenario may highlight some of the potential circumstances or difficulties surrounding these cases and the following challenges that may arise.

Ben was a trustee for his friend Aaron’s trust after Aaron passed away a year prior. During the administration of the trust, Ben was responsible for managing trust assets and accounts before distributing them to the beneficiaries of the trust: Aaron’s spouse Melissa and child Amy.

With a desire to promote the best possible outcomes for the trust, Ben decided to invest a portion of the trust account into a business stock he projected would rise.

A week after making the investment, however, the stock dropped significantly due to an unforeseen market fluctuation, resulting in considerable losses to the trust. Seeing the drop in the market, the beneficiaries wanted information about the performance of the trust investments.

The beneficiaries of the trust requested an accounting of the trust from Ben via email. Hesitant to show the beneficiaries the losses, Ben did not immediately comply with the request. After multiple emails, Ben sent an abridged version of the accounting, showing the total trust value but did not send a full accounting, stating that he is only required to do so annually. 

The Case

Yet to receive the requested, detailed accounting laying out the full scope of trust transactions, the beneficiaries of the estate brought forward a case on two charges. The beneficiaries alleged that Ben had breached his fiduciary duty by first, making an irresponsible investment and second, by failing to provide an accounting to the beneficiaries. 

After consulting an attorney, Amy and Melissa decided to pursue litigation with hopes of having the financial losses returned to the trust and seeing a clear and complete accounting of the trust. The beneficiaries gathered evidence of all their communications with the executor requesting the accounting as well as the abridged accounting that Ben did eventually provide. 

The Outcome

The court found that the money lost from the investments did not constitute a breach of fiduciary duty because the investment decision was not intentionally malicious and he was acting with a duty of good faith. The losses resulted from an unforeseen market downturn and not Ben’s negligence or lack of care.

However, the judge found that Ben had breached his fiduciary duty by not providing a full accounting of the estate. Ben was able to remain in his position, but the court ordered Ben to provide a full accounting of the estate to the beneficiaries, to which he eventually complied. 

The first case could have been avoided had he been more proactive about consulting financial advisors with more experience in the market. The other case could have been avoided had Ben understood his fiduciary duty to provide an accounting to beneficiaries as they request one.

Remember that this case scenario is just one example of a potential outcome—every case is unique, so you should consult a skilled attorney about how to handle your specific case and what legal avenues are available to you.

Address Breach of Fiduciary Duty Cases with RMO Lawyers

Whether you are a beneficiary alleging a breach of fiduciary duty or a fiduciary hoping to understand your duties in estate or trust administration, our attorneys can offer clear guidance. 

Schedule a consultation with our attorneys at RMO to take charge of your estate and secure your rights in the administration process.