Developing and Maintaining a Healthy Fiduciary Relationship

Developing and Maintaining a Healthy Fiduciary Relationship

by Brette Sember, Esq., January 2019

Fiduciary relationships are all about trust. One person—the fiduciary—is placed in a position of trust and must act in the best interest of the other person or company, usually with regard to handling assets. The fiduciary has to act with the highest degree of loyalty and care when fulfilling their duties and is personally liable if they do not.

Examples of Fiduciary Relationships

There are many situations in which one person has a fiduciary duty to another, such as:

  • A lawyer to a client
  • A spouse to another spouse
  • An employee to an employer
  • A trustee to trust beneficiaries
  • A doctor to a patient
  • An accountant to a client
  • A corporation director to the corporation and the shareholders
  • An executor of a will to the will beneficiaries
  • A business partner to the other partners
  • A stockbroker to a client

Creating a Healthy Fiduciary Relationship

In most instances, a fiduciary relationship is not something that's set up specifically by itself. It automatically comes along with a role you take on. For example, if you're hired to be a bank teller, you have your job responsibilities, but along with them comes a fiduciary duty to act in the bank's best interest.

The whole point of a fiduciary relationship is to make sure you do what's right for your employer, client, or other person you are representing—and not what's right for you. If you are a stockbroker, you need to invest your clients' funds according to their goals and wishes, not your own. A healthy fiduciary relationship is based on the trust placed in the fiduciary and the fiduciary's living up to that trust.

Specifics of Fiduciary Duties

Fiduciary duty is a broad term that encompasses two specific requirements:

  • Duty of loyalty. This means you will act in your role without personally benefiting in an economic way. If you are on the board of a corporation, you won't have the corporation contract with your husband's company just because it will benefit you.
  • Duty of care. This requires a fiduciary basically to do their homework and to make decisions based on research and careful information gathering. If you are the trustee of a trust, you must carefully research and evaluate the best way to manage the funds under your control.

Notifying the IRS

If you are in a fiduciary role as an executor, trustee, guardian, receiver, or conservator where you are basically handling someone else's money or property, you must notify the IRS.

To do so, file the Notice Concerning Fiduciary Relationship (Form 56). You'll need to file this form when the fiduciary relationship starts and also when it ends. By filing the form, you are acknowledging that you are handling an estate or funds for someone and that any notifications about this matter should go to you directly.

Breach of Fiduciary Duties

A fiduciary duty is breached when the fiduciary doesn't uphold the duties of loyalty and care. An example of a breach of duty would be if the executor of an estate failed to tell the beneficiaries about the existence of some assets that belong to the estate, and didn't account for them or disburse them. When fiduciary duty is breached, the fiduciary can be held liable for damages from the breach. In this example, the executor would be liable to the beneficiaries for the value of the missing assets and they can sue the executor for compensation.

To get help with situations involving fiduciary duty, you can work with an attorney or use an online service provider. A healthy fiduciary duty helps ensure that trust is upheld throughout the relationship and that all actions taken are in the client's best interest.