4 minute read

Fiduciary Duty in Estate Planning - What You Need to Know

What role does a fiduciary play in the estate planning process? Trust & Will breaks down fiduciary duty and what you need to know in this guide.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

Your older brother Robert asked if you’d be willing to serve as the Executor to his Estate Plan. He’s also setting up a Trust for his children, and wants to name you as his backup Trustee. In the case that Robert were to predecease you, you would have the fiduciary duty to manage his estate and act in the best interest of his children. He trusts you not to take advantage of your role, and to carry out his wishes if he were to pass away. You instinctively understand that if you were to agree, you’d be taking on a substantial responsibility. What exactly does fiduciary duty mean, and do you have what it takes to take it on? 

Whether or not you find yourself in a similar scenario, it’s not out of the question that someone could ask you to take on a fiduciary duty at some point in your life. That’s because when it comes to something as sensitive as planning one’s own estate, we want to lean on someone we can trust. However, carrying out a fiduciary duty is no walk in the park. It comes with responsibility and a significant amount of ethical weight. That’s why it’s a good idea to understand what it means to have a fiduciary duty before you agree to sign on as a part of someone’s estate. This guide will equip you with what you need to know.

What is Fiduciary Duty?

Fiduciary duty describes the responsibilities that have been assigned to an individual or entity with the expectation that they will always act in the best interest of someone else.

This definition may be difficult to interpret if you are not familiar with the concept, so let’s break it down further. According to the Merriam-Webster dictionary, fiduciary means “relating to or involving trust.” This describes the level of trust that is established between two entities, such as between a professional and their client.  In this case, the professional has a fiduciary duty to act in the best interest of their client.

Fiduciary duty often comes into play within the context of estate planning. For example, let’s say that you are setting up a Trust. You’re setting up this Trust because you’ve worked hard to build your legacy. You want to continue protecting and growing your assets as much as possible for the benefit of your child, long after you’re gone. This means that you need to appoint a Trustee, the person who you’re entrusting to manage your assets and distribute them in the best interest of your child. As you might imagine, this requires a great deal of trust. In this case, your named Trustee has a fiduciary duty for carrying out duties that maximizes financial benefit for your child. 

This is just one of several examples of fiduciary roles in estate planning. Refer to our guide for more information on what a fiduciary role looks like.

What Does It Mean to Have a Fiduciary Duty?

You just found out that you have a fiduciary duty. What does it mean? If you have been named a fiduciary, it means that you now have the duty to act on behalf of another person and in their best interest.  

Not only are you expected to carry out these duties, you are expected to carry them out with the highest level of integrity possible. You must be careful not to create any conflicts of interest, and maximize the benefit going to that person you’re acting on the behalf of as much as possible. This can get tricky if these responsibilities might come into direct conflict with your own interests or beliefs.

The duties you’re expected to carry out will depend on the role to which you’ve been assigned.

Why Is Fiduciary Duty Important? 

There are two key reasons why fiduciary duty is important. The first reason is the ability to identify whether or not an individual or entity is legally obligated to act in your best interest. There are certain roles that always carry a fiduciary duty. For instance, attorneys are always fiduciaries to their clients, Trustees to their Trusts, and company executives to their shareholders. There are legal and sometimes criminal consequences if these roles fail to carry out their fiduciary duty. 

There are other roles that don’t always carry a  fiduciary duty. A financial advisor is a great example of this. Thus, it’s always a good idea to find out whether or not the person or entity you’re working with has a fiduciary duty to you. You’ll have better peace of mind if the person you’ve appointed is legally required to act in your best interest, especially when their duties might not align with their personal interests or beliefs. 

The second reason why fiduciary duty is important is knowing that there is someone out there who can act in good faith, especially when you are not around to watch over their shoulder. There are some cases in which this need may arise during your lifetime, but the greatest peace of mind relates to the afterlife. Knowing that you can appoint someone to take care of your estate, and thus your loved ones, is priceless. We will talk about examples of fiduciary duty in estate planning shortly. 

What Are the Two Main Fiduciary Duties?

There are several types of fiduciary duties, but they tend to fall into two main categories. These are the duty of loyalty and the duty of care

Thus far, we’ve alluded to the duty of loyalty when mentioning that a fiduciary should always act in the best interest of the person or entity that they are serving. For instance, a lawyer should act in the best interest of their client. Not only is the client paying the lawyer to do so, the client may face significant legal consequences if the lawyer is not loyal to the client. Although this may seem obvious and straightforward, there are cases in which a fiduciary could find themselves in an ethical gray area. A criminal defense attorney is the perfect example. They are appointed to defend individuals who are being accused of a crime. The crime may even be as heinous as murder. The attorney still has a fiduciary duty to defend the accused as though they were innocent, even if they personally believe the client to be guilty.

The duty of care describes that a fiduciary should carry out their duties to the fullest extent. This means that they cannot cut corners on the duties they were given, nor can they fail them. An appointed fiduciary must be prepared to carry out their duty loyally, faithfully, carefully, and always in the best interest of the client.

What Are Some Examples of Fiduciary Duty in Estate Planning? 

There are several examples of fiduciary duty that come up often in estate planning.  The type of role assigned depends on the nature and intent of the estate plan. Here are some examples of common estate planning roles that have fiduciary duty:

  • Executor: An Executor is the person who is entrusted to distribute the assets of a deceased person’s estate. They are typically named in the decedent’s Will, and are obligated to carry out their last wishes. If an individual dies intestate, then the probate court will typically appoint the most logical Executor, such as the closest adult relative.

  • Trustee: Trustees are responsible for carrying out the terms of a Trust. Activities may include overseeing and making decisions about investments and assets held in a Trust to maximize their growth. Ultimately, they are responsible for distributing assets to Beneficiaries, per the conditions and terms set by the Trustor.

  • Guardian: Guardians are appointed to provide care for dependent children on behalf of their parent(s). Guardianship may be temporary, such as when a parent is unavailable due to overseas work, severe illness, or mental impairment. However, guardianship may take a more permanent shape, such as when the parent passes away. It may be the parent’s wish for the guardian to care for the dependent as if they were their own child.

  • Conservator: A Conservator may be appointed when an adult is deemed unable to manage their own affairs. This could be due to a mental illness, impairment, or disability. The Conservator may have varying degrees of duties, such as providing day-to-day care, financial care, or even managing the business affairs of the Conservatee. 

Create Your Estate Plan & Designate Fiduciary Duty Today

The key takeaway regarding fiduciary duty is that it comes with a great deal of responsibility. As a fiduciary, you have a job to carry out the wishes of the person who appointed you, even if their wishes don’t align with your own beliefs or core values. If a loved one approaches you to take on a key fiduciary role as a part of their Estate Plan, it may be tempting to say “yes” without hesitation. However, it’s always a good idea to take a moment. Think through the scope of your expected duties or responsibilities before making any type of agreement. It is completely fair to ask to review their documents or discuss their wishes. That way, you can make sure there are no conflicts of interest.

If you’re in the process of planning your estate, we hope that this guide on fiduciary duty helped highlight how critical it is to select the right person for the job. Do you have an enviable estate, or complicated family matters? If yes, then is your current Trustee someone you can trust to remain neutral and act in the best interest of your Beneficiaries? Are you sure they won’t misappropriate funds? 

These are some tough questions to ask. Some individuals choose to appoint professional Trustees (such as financial professionals) for the sole purpose of taking the responsibility off of a family member’s shoulders. 

Now that you have this information, you may feel called to create an Estate Plan that includes a fiduciary, or update your documents to change your fiduciary elections. The great thing about Estate Plans is that you can often change your mind as you gain more information. 

Ready to make a change? Trust & Will provides estate planning solutions that make it easy to establish and update your documents, whether they include a Will, a Trust, a Guardianship, or all three! Get started today.

Is there a question here we didn’t answer? Reach out to us today or chat with a live member support representative!