Fiduciary Duties

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on January 05, 2023

The term "fiduciary" comes from the Latin word fiducia which means trust, faith or confidence.

A person who owes a fiduciary duty has legal obligations to act in the best interests of another party or to manage another party's property as though it is their own.

Trustees are individuals who hold, manage, and distribute money for someone else with the intent of using it for future purposes under the direction of the owner of the trust.

Trustees have many duties that must be followed in order to maintain integrity within the investment community and protect all parties involved including beneficiaries, donors/grantors, investors, and creditors.

A trustee holds legal title to assets on behalf of a beneficiary (beneficiary law). The trustee manages assets for the beneficiary and owes the beneficiary a fiduciary duty.

The trustee must exercise care, diligence, skill, prudence, and caution when making decisions about the management of the trust assets.

Fiduciary duties are not to be taken lightly because they provide a framework that helps trustees make sound investment decisions while being held accountable to those who entrusted them with their money.

Why Are Trustees Required to Have a Fiduciary Duty?

Trustees are considered legal representatives of the beneficiary and are considered "agents" under law.

Trustee duties are similar to those placed upon directors or managers of corporations where they are expected to act in the best interest of their clients. This framework for decision-making helps protect all parties involved while allowing for transparency and accountability at all times.

Trustees are to have fiduciary duty for the following reasons:

  • To protect the interests of the beneficiary
  • To prevent self-dealing and conflicts of interest
  • To ensure proper management of the trust assets
  • To maintain transparency and accountability to the donor/grantor and other interested parties

Elements of Fiduciary Duties

There are four general elements that fiduciaries must adhere to when performing their duties:

Duty of Care

This is the duty to use reasonable care, skill, and caution when making decisions about the management of trust assets.

The trustee must act in good faith and with due diligence when making investment decisions on behalf of the beneficiary.

Duty of Loyalty

This is the duty to act solely in the interest of the beneficiary. The trustee should not use their position to give them an unfair advantage over others (self-dealing).

Duty to Act Lawfully

This is the duty to make decisions that are based on existing laws and regulations. Thus, the trustee should not engage in illegal activities when handling trust assets.

Duty to Act With/in Good Faith

This is the duty to act in good faith towards all parties involved including all investors, creditors, beneficiaries, donors/grantors, and other interested parties.

Fiduciary Duties of a Trustee

The following are the fiduciary duties of trustees:

Adhering to the Terms of the Trust

The trustee must adhere to the terms of the trust. This means they must act in accordance with what was asked of them by the donor/grantor when establishing the trust.

The terms of the trust refer to the guidelines that were set up by the donor/grantor. For example, if it is said in the trust to hold all assets for future generations or to pay out income every month, then the trustee must abide by this without engaging in illegal activities.

Protecting Trust Assets

The trustee is responsible for protecting the assets of the beneficiary. They must act prudently and manage these assets with care and caution when making investment decisions.

The trustee cannot allow their own interests to interfere with the management of the assets (self-dealing).

Recurring Duties

As fiduciary, trustees have ongoing duties that they must follow such as: maintaining accurate records; providing reports on an annual basis; filing taxes where necessary; complying with all state and federal laws; and, informing the donor/grantor or other interested parties of any material changes.

Administering Trust Property Efficiently

The trustee must provide full disclosure to all interested parties about how assets are handled and maintained. The trustee must also carefully manage the trust's property while it is held in their care.

Proper Record Keeping

The trustee has a duty to maintain accurate records of all transactions made on behalf of beneficiaries (entity accounting). They must ensure that they follow any statutes, rules, or provisions set forth by law that apply to record-keeping within trusts.

Diligent Management Duties

The trustee must act diligently when making decisions about the trust. This means they should take all factors into consideration and make informed decisions that will be in the best interest of the beneficiary.

Investment Duties

In order to carry out their fiduciary duties, trustees are often responsible for investing trust assets. They must adhere to the standard of care when making these investments and ensure that any transactions made are in the best interest of the beneficiary.

The Bottom Line

When trustees are appointed, they must act in the best interest of the beneficiary at all times. Fiduciary duties provide a framework for trustees to make sound investment decisions without having their own interests interfere. This helps protect all parties involved and builds trust within the investment community.

Additionally, trustees must maintain accurate records of all transactions and communications made on behalf of the beneficiary. This allows for transparency and accountability while also ensuring that the trustee is in compliance with any applicable laws.


Fiduciary Duties FAQs

What is a fiduciary duty?

A fiduciary duty is a legal obligation to act in someone else's best interest when making decisions. In the case of trustees, they have a fiduciary duty to act in the best interest of the beneficiary.

What is a trustee?

A trustee is a fiduciary who is appointed to manage the assets of a trust. They must act in the best interest of the beneficiary at all times and adhere to the standard of care when making investment decisions. Trustees often have investment duties where they are responsible for managing and investing trust assets.

What is the standard of care?

The standard of care is the level of diligence that is expected when making decisions about the trust. Trustees must take all relevant factors into account and make informed decisions that are in the best interest of the beneficiary.

Who enforces a fiduciary duty?

A court may find that an individual failed to adhere to their fiduciary duties and order restitution or other relief as appropriate. If you feel there was negligence by trustees who failed to fulfill their obligations under the standard of care, you can seek legal counsel.

Can trustees delegate some of their duties?

Yes, trustees can delegate some of their duties to third parties in order to properly manage the trust. They do, however, have a duty to be aware of how the delegation process is going and any information that may be disclosed during this process.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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