What is fiduciary duty?

Introduction

A fiduciary relationship is any contractual relationship in which at least one party is required to act in good faith and for the benefit of the other. Common fiduciary relationships include those between a lawyer and their client, an investor and the investee, and a financial advisor and their advisee.

One of the most common examples is that of a trustee or executor and an estate’s beneficiaries during trust or probate estate administration—the estate administrator has a fiduciary duty to act in the beneficiaries’ and estate’s best interests in all trust or probate matters pertaining to the estate.

This fiduciary duty protects beneficiaries and heirs against unjust treatment from those representing the decedent’s estate. Understanding fiduciary duties allows beneficiaries and heirs to protect themselves against breaches of this duty and ensure that they can secure access to their rightful inheritance in line with the wishes of the trustor or settlor.

What is a Fiduciary?

A fiduciary is any person who manages money or property for someone else or acts on their behalf in legal matters with the intention of preserving the client’s best interests. While a trustee/beneficiary relationship is one of the most common fiduciary relationships, being bound by fiduciary duty can exist in any number of ways.

Some of the most common instances of fiduciary relationships include:

• Business partnerships
• Joint ventures
• Marriage
• Officers in a corporation
• A trustee and beneficiaries
• A guardian and their ward
• An executor of an estate
• Pension fund trustees
• Contractual relationships

What is a Fiduciary Duty?

A fiduciary duty is the responsibility of a person in a fiduciary role to act in the best interests of the party that they represent. The represented party can be an individual, a legal entity like a corporation, members of a designated group, or an estate.

When a person does not live up to their responsibilities in one of these roles, they are said to be in breach of their fiduciary duty. This breach generally falls into three categories including a breach of reasonable care (aka negligence), a breach of duty of loyalty, or a breach of confidentiality. In other cases, fraud is also considered a violation and is commonly referred to as fiduciary fraud.

It is possible to file a claim against someone who has breached their fiduciary duty. An experienced attorney must be able to prove that a fiduciary duty existed, that it was breached, that there was harm or damages, and that the breach was the cause of the damages.

The following hypothetical scenario may help illustrate what a fiduciary duty may look like in a real-world situation and the complexities that could arise in the process:

James Mitchell was a successful businessman from Los Angeles who passed away, leaving a detailed will. His estate included a large family home, various bank accounts, and several investment properties. He identified his two children, Beatrice and Ben, as the primary beneficiaries of his will. 

In his will, he named his close friend, Truman, the executor of his estate, giving him the responsibility of administering the estate and its assets to the identified beneficiaries. As the estate’s executor, Truman was expected to manage the assets of the property, bank accounts, and investment properties and distribute them fairly to Beatrice and Ben as laid out in James’ will.

What Are the Duties of a Fiduciary?

By becoming a fiduciary, an individual assumes several responsibilities to their client. These responsibilities dictate a fiduciary’s actions and should guide their decision-making as they work with clients and manage their assets.

Some of the duties of a fiduciary include:

• Duty of loyalty – Fiduciaries must remain loyal to their clients by prioritizing the interests of both their clients and the estate while avoiding conflicts of interest or self-dealing.
• Duty of care – A fiduciary has a responsibility to act with care and due diligence while making informed decisions that benefit the client.
• Duty to disclose – Fiduciaries must maintain full transparency in any transactions surrounding estate assets, keep their clients reasonably informed of any decisions about managing these assets, and maintain clear accounting in the process.

These three duties act as an umbrella, setting the tone for what actions a fiduciary must take and preventing them from taking harmful actions like neglecting their accounting responsibilities, withholding information from beneficiaries, and more.

In Truman’s role as estate executor, he was responsible for managing and distributing the assets of the estate to the beneficiaries. In managing the estate, he was tasked with several responsibilities, including selling James’ home, responsibly managing his investment accounts, and maintaining the condition of all estate properties.

During the process, Truman was responsible for keeping beneficiaries informed about the progress of the estate administration process and only conducting transactions that benefit the estate by preserving or growing its financial resources. 

Fiduciary Duty Meaning in Different Contexts

In any case, fiduciaries are expected to act in the best interests of those they represent. However, this duty may look slightly different based on the context of the relationship. The most common contexts where a fiduciary plays an important role are in finance and law. 

In both the financial and legal realms, professionals are bound by fiduciary duties, which oblige them to act in the best interests of their clients and maintain transparency in their actions.

These duties apply to:

• Financial Advisors, Brokers, and Investment Managers: These professionals are entrusted with making financial decisions and managing investments on behalf of their clients. They are legally obligated to prioritize their clients’ interests over their own and provide advice that aligns with their clients’ financial goals and circumstances.
• Lawyers and Legal Representatives: Similarly, lawyers and other legal representatives are expected to advocate for their clients while upholding ethical standards and ensuring transparency in their dealings. Whether serving as administrators, trustees, executors, or in any other capacity, legal professionals must prioritize their clients’ interests and act following their wishes and best interests.

What Constitutes a Breach of Fiduciary Duty?

A breach of fiduciary duty occurs when a fiduciary fails to act in the best interests of a client, acts in their own self-interest, or acts in a way that directly causes harm to the client and their assets. However, a breach of this duty can manifest in many forms, as there are several ways a fiduciary can fail to protect the interests of a client or estate.

Grounds for a breach of fiduciary duty case are defined as follows:

“To succeed in a breach of fiduciary duty case, the plaintiff must demonstrate that the defendant owed them a fiduciary duty, violated this duty, and caused them harm or losses. If successful, the plaintiff may be entitled to compensation for their damages.”

Common examples of breaches of fiduciary duty include:

• Conflicts of interest, like self-dealing or favoring one beneficiary or heir over another
• Negligence in reporting or accounting to a client or the state
• Failure to report important information or actions to clients
• Making irresponsible or negligent decisions that result in financial losses to the estate
• Mismanagement of a client’s funds or assets
• Breaching confidentiality by sharing client information

It’s important to note that breaches of fiduciary duty can vary widely. For example, breaches of this duty can be egregious acts of misconduct, such as directly stealing from an estate, or well-intentioned but irresponsible actions, like investment decisions that result in significant financial losses. Regardless of the difference in intent between these two actions, they both compromise the interests of the estate and affect the value of assets, constituting a breach of fiduciary duty.

Consequences for a fiduciary at a basic level often include removal or suspension from a role, especially in cases of negligence. However, depending on the severity of their actions, a fiduciary may face more serious legal consequences. For example, in cases where the actions of a fiduciary have resulted in stolen or mismanaged assets, clients may pursue restitution through legal avenues to recover any of these lost assets or to hold the trustee liable for the lost property.

Although the administration of James Mitchell’s estate seemed straightforward at first, Truman’s actions as executor quickly raised concerns between Beatrice and Ben. From a lack of communication to mismanaging assets, Truman demonstrated irresponsible mismanagement in several areas of his role. 

His actions included: 

• Failing to keep beneficiaries informed about the progress of the administration.
• Mismanaging assets by taking too long to list and sell estate properties in a favorable real estate market resulting in the properties losing value from unnecessary delays.
• Improperly handling investment accounts without consulting a financial advisor, leading to significant losses as a result of market conditions and penalties.
• Demonstrating a conflict of interest by awarding maintenance and repair contracts for estate properties to his brother-in-law’s company at above-market rates without seeking competitive bids.
• Using estate funds to cover personal expenses like travel and dining under the guise of estate business.
• Ignoring beneficiaries’ concerns about delays and financial decisions by asserting his authority as executor. 

How To Protect Yourself from Breaches of Fiduciary Duty

Although you can’t prevent someone from breaching their fiduciary duties, you can take steps to reduce the likelihood of it happening and defend yourself against the potential risks. Clients working with a fiduciary can take several steps to protect themselves from breaches of fiduciary duties.

Due Diligence in Selecting Fiduciaries

A fiduciary handles important legal and financial matters for you, which can have significant repercussions. Therefore, you have the right to take all potential precautions to ensure you choose the most reliable person for the role. As you search for a fiduciary to represent you, be sure to do your due diligence in the research process.

This due diligence can include:

• Seeking referrals from friends or family
• Searching for fiduciaries online
• Exploring reviews and recommendations of fiduciaries online
• Contacting references for candidates
• Running a background check on potential candidates
• Reviewing the details of the fiduciary’s license on your state’s licensing database

Regular Monitoring and Communication with Fiduciaries

Regular communication with clients is a fundamental part of a fiduciary’s duty. Communication is also an important step to holding fiduciaries accountable, protecting yourself against potential breaches of their duty, and understanding what steps they are taking to manage your assets so you can determine whether they are acting in your best interests.

You can also hold a fiduciary accountable by requesting transparency throughout the estate administration process. For example, requesting up-to-date accounting records at least yearly allows you to monitor their spending and ensure that they are managing assets responsibly while upholding their commitments to the estate. If a fiduciary does not provide this information upon request, you can file a court petition to order them to provide this accounting.

Legal Recourse and Avenues for Redress

In cases where a breach of fiduciary duty has occurred, clients can protect themselves by seeking legal recourse for the damages they’ve experienced as soon as possible. The support of an experienced fiduciary litigation attorney is crucial for ensuring clients can seek appropriate restitution.

Available legal options for recourse include:

• Removal of a trustee or executor
• Monetary compensation for losses
• Compelling compliance with fiduciary obligations
• Damages for emotional distress

The type of damages that are recoverable will vary based on the details of each case. For example, in a case of self-dealing, where a fiduciary redirects assets from the estate for their own personal gain, the court will likely order them to repay the financial losses to the estate. 

However, in a case where a fiduciary failed to maintain consistent communication with their clients but there were no losses to the estate, they will likely order the fiduciary’s removal from their role and appoint a new personal representative to the position. 

Victims of breach of fiduciary duty are advised to seek guidance from a knowledgeable attorney to understand their legal rights and explore available options for recourse from the damages incurred.

In our hypothetical case, the beneficiaries of James’s estate became suspicious of Truman’s lack of communication and decided to pursue legal action. They filed a lawsuit that alleged breach of fiduciary duty, mismanagement of the estate, and self-dealing. They presented evidence to the court that highlighted the delayed property sales, improper investment management, and personal use of estate funds.

The court found Truman guilty of breaching his fiduciary duty. He was removed from his role as the estate executor and ordered to repay the estate for the losses incurred due to his mismanagement and self-dealing. 

A professional executor was then appointed to manage the remaining steps of the estate administration process. The professional executor took over, providing regular updates to beneficiaries and making prudent decisions regarding the estate’s assets. 

This scenario highlights the importance of upholding a fiduciary duty, as breaching one’s duty comes with severe consequences. Estate mismanagement, lack of transparency, conflicts of interest, and personal use of estate funds are all serious violations that could lead to administrator removal. 

Partner with RMO Lawyers to Uphold Fiduciary Standards

A fiduciary duty compels lawyers, financial advisors, and the like to act in the best interests of the clients they serve. In probate estate administration, upholding a fiduciary duty includes acting to keep clients reasonably informed, responsibly managing an estate’s assets, and upholding the interests of the decedent. A breach of this duty could lead to significant losses for the estate and the beneficiaries entitled to an inheritance.

At RMO, our breach of fiduciary duty attorneys represent clients in trust and probate-related manners to ensure trustees and executors fulfill their fiduciary duty and preserve the interests of the estate. If you suspect a trustee or executor is in breach of their fiduciary duty, we can support you in building a case and seeking appropriate restitution.

We work with both beneficiaries and fiduciaries to ensure that all legal standards are met and the interests of the estate are preserved. With decades of experience supporting clients in breach of fiduciary duty cases and other probate and estate administration matters, we will help you build a winning strategy for your case.

Schedule a consultation with our team today to discuss your case and learn more about your legal options for recourse.