What are “Fiduciary Duties?”

Trust, Puzzle concept.

If you’ve spent any time reading about the law, especially about trusts and estates, you may have come across the term “fiduciary duty” and wondered what it means. One person or entity is a fiduciary if they have a legal and ethical obligation to act in the best interests of another, who is called the principal. The fiduciary must be aware that the principal’s trust and confidence is being placed in them, and they must knowingly accept that responsibility, agreeing to place the principal’s interest above their own.

There are many examples of fiduciary relationships. One such relationship is the relationship between a lawyer and their client. When you hire an attorney, you assume that they will handle your legal matter in a way that’s best for you, but you may not have thought about why you assume that. The answer is that a lawyer is a fiduciary. If they fail to act in your best interests and prioritize your interests over their own, they could face negative consequences, including professional discipline and civil liability. Depending on the situation, they might even be exposed to criminal penalties for a breach of fiduciary duty.

Types of Fiduciary Relationships

In addition to the relationship between an attorney and a client, some examples of fiduciary relationships include:

  • Certain financial advisors to their clients
  • Real estate agents to their clients
  • Officers and directors to their corporation or nonprofit organization
  • Legal guardians to their wards
  • Trustees to beneficiaries of the trust
  • Personal representative (executor) of an estate to the beneficiaries of the estate

As a law firm that deals with many probate lawyers, we have a fiduciary relationship to the personal representatives we serve, just as they have a fiduciary duty to the estate they are managing and the beneficiaries of that estate.

Most executors may not think of themselves as fiduciaries, or even be familiar with the term. If you are serving as the executor of an estate, chances are you are a family member trying to do the right thing for the estate and your loved ones, simply because it is the right thing. However, it’s a good thing to understand fiduciary duty and take it seriously. Breaching your fiduciary duty could expose you to legal liability, which of course, you do not want. But it can also lead to mistrust among family members and destroy cherished relationships.

Simply having good intentions is not enough to avoid a breach of fiduciary duty, unfortunately. It is possible to unintentionally or carelessly do something that causes loss to the estate or its beneficiaries.

Understanding an Executor’s Fiduciary Duty

An executor of a deceased person’s (decedent’s) estate owes the estate and its beneficiaries the responsibility to act with good faith, honesty, diligence, transparency, integrity, fairness and loyalty. What exactly does that mean? Well, remember that we were talking about the obligation to act in the principal’s best interest; everything comes back for that.

For instance, the executor is required to keep beneficiaries informed of matters that could affect their rights to the estate. A common example is if there is a hearing in the probate matter; beneficiaries have the right to be notified and to attend, and it is the executor’s responsibility to make sure they have that notice. That said, while the executor is obligated to maintain good records and keep beneficiaries informed of estate business, they do not need to communicate every action they take on behalf of the estate.

Executors are also responsible for preserving estate assets. Of course, they have to pay legitimate debts of the estate, including taxes, but they must safeguard assets against theft, damage, or other loss. For this reason, executors and other fiduciaries are prohibited from self-dealing. Self-dealing could include an executor selling himself an asset from the estate for less than its fair market value, or investing estate assets in a way that earns him a commission or fee.

Since executors are often close family members, it is common for one person to be both the executor of an estate and a beneficiary. That is not a prohibited conflict of interest. However, an executor cannot favor one beneficiary (including himself) over another. He must abide by the terms of the will (or state law if there is no will).

Avoiding a Breach of Fiduciary Duty

In general, acting in good faith will get you a long way when you are serving as an executor, but being a fiduciary is still a heavy responsibility. Most people who act as an executor have never done so before, and may be unfamiliar with their obligations. A well-intentioned error, such as paying an estate debt before another debt that has legal priority, could result in loss to the estate.

Administering an estate is complicated. Fortunately, you do not have to do it without guidance. The services of an experienced probate attorney are considered a benefit to the estate and are generally payable out of estate funds (not the executor’s pocket). A probate attorney can give you as much or as little guidance as you need and can help you avoid breaches of fiduciary duty by keeping good records and informing beneficiaries.

If you are an executor of a New Mexico estate, trustee of a trust, or someone else who needs guidance to carry out your fiduciary duties, contact The Law Offices of Dana M. Kyle to schedule a consultation and get the support and information you need.

Categories: Probate