What Standards Apply to a Trustee? (What’s my fiduciary duty?)

They are trusting you to take care of them and their beneficiaries.

Fiduciary duty represents one of the most significant legal obligations in business and professional relationships. This fundamental concept establishes the highest standard of care and loyalty between parties, requiring fiduciaries to act in the best interest of their beneficiaries rather than themselves.

What Is Fiduciary Duty and Why Is It Important?

A fiduciary duty exists when one person or entity (the fiduciary) is entrusted with acting on behalf of another (the beneficiary). This relationship creates a legal obligation for the fiduciary to act solely in the beneficiary’s best interest, placing those interests above their own. The importance of fiduciary duty cannot be overstated. It serves as the foundation for trust in a professional relationship.

When trustees make decisions, they must consider how these choices affect trust beneficiaries rather than their personal gain. This obligation ensures accountability and helps protect those who rely on others to manage their affairs or assets.

Fiduciary relationships are characterized by:

• A significant imbalance of power or information.

• The requirement to act with good faith and honesty.

• The obligation to avoid conflicts of interest.

• The responsibility to maintain confidentiality.

These duties are enforced through legal frameworks which vary by jurisdiction but consistently uphold the principle that fiduciaries must prioritize their beneficiaries’ interests.

The Two Core Fiduciary Duties: Loyalty and Care

While fiduciary responsibilities encompass several obligations, two primary duties form the cornerstone of fiduciary relationships: The duty of loyalty and the duty of care.

Duty of Loyalty

The duty of loyalty requires fiduciaries to act in good faith and in the best interest of their beneficiaries. This means avoiding conflicts of interest and never using their position to gain personal advantages at the beneficiary’s expense. Key components of the duty of loyalty include:

• Avoiding self-dealing transactions.

• Disclosing potential conflicts of interest.

• Maintaining confidentiality of sensitive information.

• Refraining from competing with the beneficiary’s interests.

For example, a trustee who steers contracts toward a company they own without disclosing this relationship clearly violates their duty of loyalty.

Duty of Care

The duty of care establishes the standard of attention and diligence required of fiduciaries. It mandates fiduciaries make informed, prudent decisions based on all available information. This duty requires fiduciaries to:

• Exercise reasonable diligence in decision-making.

• Seek appropriate information before making decisions.

• Apply their skills and expertise to the benefit of the beneficiary.

• Maintain appropriate oversight of delegated responsibilities.

The duty of care is often defined as what a reasonably prudent person would do in similar circumstances. For trustees, this means thoroughly reviewing account statements, taxes, asking the “right” questions, and consulting with experts when necessary.

Relationship of Trust

Serving as a trustee involves trust, reliance, and the expectation that the fiduciary will act honorably and in the beneficiary’s best interest.

What Constitutes a Breach of Fiduciary Duty? What Are the Legal and Financial Consequences?

A breach of fiduciary duty occurs when a fiduciary fails to fulfill their obligations of loyalty or care. These breaches undermine the trust essential to fiduciary relationships and often result in significant consequences. Common examples of breaches include:

• Misappropriating funds or assets.

• Making decisions based on personal gain rather than beneficiary interests.

• Failing to disclose conflicts of interest.

• Neglecting to perform due diligence before making important decisions.

• Sharing confidential information inappropriately.

The consequences of breaching fiduciary duties are substantial and often include:

• Legal Penalties: Courts enforce fiduciary obligations through various remedies, including financial damages, disgorgement of profits, and removal from positions of trust.

• Financial Restitution: Fiduciaries who breach their duties typically must compensate beneficiaries for losses incurred.

• Professional Consequences: Many professionals face disciplinary action from regulatory bodies, including license suspension or revocation.

• Reputational Damage: Beyond legal consequences, breaches often result in lasting reputational harm which affects future opportunities.

How to Prove a Breach: Key Legal Elements

Establishing a breach of fiduciary duty in legal proceedings requires proving specific elements. Understanding these components helps organizations identify potential breaches and take appropriate action. To prove a breach of fiduciary duty, the following elements must typically be established:

• Existence of a fiduciary relationship: Evidence must show a relationship existed where one party was obligated to act in the other’s best interest.

• Breach of the fiduciary’s duty: Documentation must demonstrate the fiduciary failed to fulfill their obligations of loyalty or care.

• Damages: The breach must have caused actual harm or damages to the beneficiary.

• Causation: Evidence must connect the fiduciary’s actions directly to the harm suffered.

The burden of proof varies by jurisdiction, but generally, once a fiduciary relationship is established, the fiduciary bears the responsibility of demonstrating they acted appropriately.

In conclusion, if serving as a trustee, you must act prudently in a manner that would be appropriately careful and professional. You must be loyal to the beneficiaries and not to yourself. Never, ever make a decision in haste or that benefits you instead of the beneficiaries. Remember that you are ultimately responsible...and that's why the root of trustee is "trust."

Curry Andrews, Attorney at Law