A fiduciary is an individual or company who has a legal obligation to put their clients’ best interests above their own. People who make financial, legal, or medical decisions on your behalf typically have a fiduciary duty. This is common in situations where someone is incapacitated or cannot take care of themselves. Anyone who simply advises you on these subjects may also be bound by this duty, but not always. For example, not all financial advisors have a fiduciary duty.
It’s particularly important to understand fiduciary duties when you’re estate planning. Estate planning requires that you make preparations for what happens to your assets around the time of your death, and what kind of health care you want to receive if you become incapacitated. Next we'll go into more detail on these relationships and on how the fiduciary duty affects you.
The trustee of a trust
A trust is a legal entity that people can place assets — money, investments, real estate, or other personal property — into so that they’re easier to transfer to others (called the beneficiary of the trust).
Trusts are most common when people want the ownership of a specific asset to smoothly transfer after they pass away. The person who manages the trust is called the trustee and they have a fiduciary duty to handle the trust and all of its assets in a way that most benefits the trust’s beneficiaries.
As an example, fiduciary obligations mean trustees cannot use the trust to make money for themselves unless they’ve been instructed to do so. Disregarding this legal obligation opens the trustee up to legal action.
When you pass away, everything you own at the time of your death becomes part of your estate. Everything in your estate then needs to get passed on to others. In many cases, this requires going through probate, which is a process where a court determines how to pass on your estate’s assets.
The executor — also called the personal representative — of your estate is the person you choose to take care of your affairs after your death. That includes tasks like paying your income tax bill and the estate tax if your estate is required to pay the estate tax.
Executors also oversee disbursement of your estate to the proper heirs. When managing an estate, an executor is required to act in the best interests of the estate’s beneficiaries. And if the executor is also a beneficiary, they cannot handle the estate in such a way that increases their own inheritance overs others’, unless instructed to do so.
If you don’t name an executor, a court will appoint an administrator to handle those duties. The administrator must still act as a fiduciary.
Guardians and wards
Guardianship, sometimes called conservatorship, gives a guardian the authority to make fundamental medical and financial decisions on behalf of someone else, who is called the ward. Many people think of guardianship as it relates to children, but it can also be granted over seniors who are incapacitated and cannot take care of themselves.
Guardians have access to their wards’ finances and medical records, so they have a fiduciary duty. Otherwise, they could take advantage of their wards for their own personal gain.
Understanding guardianship, which is a part of elder law, is an important part of estate planning. This guide to elder law will help you understand how elder law can affect your estate plan.
All lawyers have a fiduciary relationship with their clients. Lawyers help people to make legal, financial, and sometimes even medical decisions. This is especially easy to see in the case of an estate planning attorney. Estate planning attorneys help clients plan for what happens to their estates after death, and what kind of health care they want to receive in case they become incapacitated. People place a lot of trust in the advice they receive from an attorney because they often do not have a strong understanding of how to approach the estate planning process.
So, for example, if a lawyer advised you that it was best to create a trust that named the lawyer as the sole beneficiary, even though you had wanted to name other family members as beneficiaries, the lawyer would be in hot water legally if their advice was found to not actually be in your best interests.
Power of attorney
Naming someone as a durable power of attorney gives them the legal ability to step in and make legal or financial decisions for you if you become incapacitated. That includes doing tasks like making your mortgage payments and handling your bank accounts. Anyone you give this power to is required by law to act in your best interests.
A durable power of attorney is also one of the estate planning documents everyone should have so that you know someone who you trust will be taking care of your things.
Financial advisors (sometimes)
Financial advisors give client financial advice to help them make decisions related to their money. In some cases, this only includes picking stocks or other assets for a portfolio. In other cases, it includes holistic financial planning that covers investment advice, mortgages, business planning, tax planning, life insurance policies, managing retirement accounts, and a variety of other financial services.
It’s important to know up front that not all financial advisors are fiduciaries. If someone is not a fiduciary, there is no guarantee that they will be making decisions based solely on what they believe is the best for you and your specific situation. On the other hand, fiduciary financial advisors are required to disclose all potential conflicts of interest.
Ask all potential advisors if they are fiduciaries, and check the registered with the U.S. Securities and Exchange Commission (SEC) website. All financial and investment advisors who register with the SEC (or an equivalent regulator at the state level) have a fiduciary duty to their clients. If they do not uphold this duty, they may face legal and financial penalties.
Some of the advanced certifications that advisors receive, such as the Certified Financial Planner (CFP) designation, also require the person to work as a fiduciary.
Instead of having a fiduciary duty, broker-dealers, stockbrokers, and insurance agents are usually bound to the suitability standard. Suitability only requires someone to make recommendations that could be suitable for your personal situation. These individuals usually receive compensation for selling certain products or plans.