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What "Fiduciary" Actually Means

10/12/2014 09:09 EDT | Updated 12/10/2014 05:59 EST
Fiduciary is a common word that is often misused because of its complicated definition and variety of meanings and uses.  While it refers to an individual that owes certain special obligations to another that are based on trust, it also describes the obligation itself, distinguishing it from an ordinary obligation.

In fiduciary relationships, an individual such as an estate trustee or an attorney for property or personal care has certain obligations to another -- a beneficiary or an incapable person.  Not every obligation taken on by a person in a position of trust is a fiduciary obligation. When there are special obligations based on trust, they can be defined as fiduciary obligations.  It is necessary for trustees to understand the scope of their obligations and the kind of scrutiny to which they may be subjected in performance of those obligations. Many, even professionals who are not necessarily familiar with this area of law, have trouble conceptualizing this idea but it becomes very important when the actions of a trustee are called into question, through litigation or otherwise.

If all of the obligations of trustees were characterized as fiduciary, their roles would be far too extensive. Legally, those obligations that are recognized as fiduciary obligations are examined with more scrutiny. It is important that trustees understand the scope of their obligations and against what standard their actions will be measured. Often, it is advisable for trustees to seek out legal advice in order to determine how best to perform their duties, particularly those that are legally considered to be fiduciary in nature.

Courts have, over many years, delineated which obligations are considered to be fiduciary and which are non-fiduciary. When it comes to costs, if acting in a fiduciary capacity, a person may be indemnified or protected when they are required to take a difficult step. On the other hand, a fiduciary can be exposed to legal costs if they act improperly. If someone acts with dutiful and loyal conduct, the courts typically order their legal costs paid. 

There is an underlying policy reason for this distinction, which is the need to encourage a fiduciary to take on certain jobs and legal duties that can in some cases be onerous.  The law aims to provide certain protections to fiduciaries, while also guarding against abuse.

The scrutiny of a fiduciary, furthermore, does not only occur in the context of litigation.  Trustees must always consider the nature of their roles with respect to what task is being undertaken and whether it, particularly, merits the standard of care of a fiduciary obligation.  

Estate accounting is a good example of where different roles can be undertaken simultaneously. As an estate trustee, an individual may take on tasks that are typically considered to be in the realm of legal professionals -- i.e. completing a real estate deal or preparing a passing of accounts application. On the other hand, there are also clerical duties to be taken care of. When examining the accounts of a fiduciary, the court will look at the specific role that was being fulfilled and act accordingly.

Fiduciaries must also understand possible conflicts of interests that can arise and avoid any associated issues.  For example, an estate trustee who invests property cannot profit in her personal capacity when acting in a fiduciary role to another. Someone acting as attorney or guardian for an incapable person can also confuse priorities, whether deliberately or unintentionally, and end up making decisions for selfish reasons, rather than making decisions that are purely in the best interests of the incapable.

In summary, whether a trusted individual is acting in the course of regular administration or otherwise, it is critical they understand the concept of fiduciary obligations.  When an action by a trustee, attorney or guardian falls under the umbrella of his or her fiduciary duties, the standard of care is also elevated accordingly.  

*Ian Hull and Suzana Popovic-Montag are partners at Hull & Hull LLP, an innovative law firm that practices exclusively in estate, trust and capacity litigation. To watch more Hull & Hull TV episodes, please visit our Hull & Hull TV page.