What is a fiduciary? This is an important question that can come up for you in several instances in your life, such as when you’re looking to hire an attorney, work with a financial advisor, or appoint someone to help execute your Estate Plan. Simply put, a fiduciary should always put your own interests above their own. Some roles always hold a fiduciary duty, while others don’t. That’s why it’s always important to understand whether the person you’re working with or appointing is a fiduciary. That way, you’ll know if they are legally obligated to act in your best interest. In this guide, we’ll help define “what is a fiduciary,” how they might differ from a financial advisor, and why it’s important for estate planning.
What Is a Fiduciary?
A fiduciary is a person or an entity that acts in the best interest of another person. The fiduciary may have been appointed in a professional capacity, where they are serving the best interests of a client. However, they may also be voluntary instances. There are also instances where the groups of people may take on the fiduciary or client role.
Let’s discuss some examples to help clarify. An attorney is a fiduciary to their client. They are legally and financially liable to always act in the best interest of a client. Otherwise, the client may suffer significant legal consequences. The attorney is responsible for defending the client to the best of their ability, even if the case does not align with their personal values. They must also be careful not to take on any other clients that would create a conflict of interest, such as another person involved in the same case.
A group of company executives have a fiduciary duty to their shareholders. They have a collective duty to maximize corporate value and profits such that they can provide the highest possible returns to their shareholders. Otherwise, a shareholder may lose value and ultimately divest.
In a final example, a charity is an example of an entity that has a fiduciary duty to both its donors and its beneficiaries. The donors place trust in the charity to use donated funds as intended, and to not misappropriate them. Beneficiaries also place trust in the charity to maximize the benefit that is provided to them.
We will touch on the importance of a fiduciary in the context of estate planning and provide examples shortly.
What’s the Difference Between a Fiduciary and a Financial Advisor?
It’s important to note here that the concepts of a fiduciary and a financial advisor are not mutually exclusive. There are many types of financial advisors, but they are not always a fiduciary. Unfortunately, it often falls on the client’s shoulders to verify whether or not a financial professional has a fiduciary duty to them. Our fiduciary vs. financial advisor article explains this in detail.
Why Is a Fiduciary Important for Estate Planning?
Earlier, we mentioned that a fiduciary role takes on significance for estate planning. First, let’s talk about why people set up an Estate Plan in the first place. The most common reason is to protect your property such that it can be passed on to those you love. You also want this process to take place in such a way that protects your loved ones from stress, or worse, infighting. Unfortunately, this can happen when an Estate Plan is poorly executed.
The good news here is that you absolutely have the power to prevent poor execution from happening. The first step is creating estate planning documents that are clear, concise, and legally sound. This minimizes any room for legal confusion or misinterpretation. The second step is choosing the right people to be involved in your estate plan. These are your fiduciaries, the individuals you are entrusting to execute your vision when you are no longer around or are no longer able to provide oversight.
Not only is it critical to select someone you can trust, it’s also important to pick someone who is right for the role. Even your most well-meaning sibling might cave under pressure and have trouble maintaining their neutrality if others began to fight over your estate. Before naming a fiduciary for your estate plan, be sure to understand what fiduciary duty in estate planning entails so you know what it takes. If you don’t have anyone right for the job, or want to relieve family members from these duties, you also have the option to pick a professional fiduciary for your estate. This could be an attorney or financial professional of your choosing.
Create Your Estate Plan Today & Designate a Fiduciary
What is a fiduciary? If you started out with this question, we hope that you feel satisfied with the answer. Essentially, a fiduciary is any person or entity that has the legal obligation to act in your own interest, and not theirs.
Fiduciaries take on an important role in the context of estate planning. When you are planning out your estate, you’ll quickly realize the need for a trusty individual who can see to it that your wishes are carried out. This can apply in the case you were to pass away or even become unable to oversee your own estate for long periods of time. Therefore, picking the right fiduciary is an important task that should be thought through carefully. You may even feel compelled to update your fiduciaries if you start feeling like the ones you have in place aren’t the right fit for the job.
If you need any help setting up a fiduciary and navigating how to select the right person or entity for the role, we’re here for you! At Trust & Will, we strive to make these difficult decisions as painless as possible. Our solutions make setting up Will, Trust and Guardianship documents a breeze so that you can preserve your energy to focus on the bigger picture. Are you ready? Get started today and claim control over your own future!
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