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What is a Fiduciary?

The meaning of fiduciary comes from a Latin word that means “trust”. Put simply, a fiduciary manages property or money on behalf of a beneficiary. Because this is a high position of trust, the fiduciary is held to a higher legal standard than in a regular business relationship.

The United States Court System has not provided a clear definition of fiduciary relationships because responsibilities may not be the same in every case. However, certain business relationships are understood to be fiduciary in nature. These include, but are not limited to the arrangements between:

  • Trustee and Beneficiary
  • Guardian and Ward
  • Principal and Agent
  • Attorney and Client
  • Doctor and Patient

Any relationship in which one party completely depends upon and trusts another can be considered a fiduciary relationship, including relationships between family members. However, an existing family tie doesn’t automatically fall under this legal definition. The ultimate determination is in the degree of dependence or trust the beneficiary places in the fiduciary.

Fiduciary Duty Definition

This term has a legal definition. Specifically, it refers to the legal obligation of one party to act in the best interest of another. It is usually invoked when the obligated individual or organization handles money or property on behalf of a beneficiary.

Fiduciary duty is more than a legal obligation; it is also an ethical one. The fiduciary must avoid any conflict of interest when handling the beneficiary’s assets. In most cases, he or she may not profit from the relationship unless the beneficiary grants explicit consent when it is initiated.

Types of Fiduciary Duties

Fiduciary responsibility varies according to the type of relationship established.

Trustee and Beneficiary

Estate trusts are overseen by a trustee. The trust legally owns the property or asset, and the trustee administrates it on behalf of the beneficiary. The trustee is legally required to make decisions in the best interest of the beneficiary, who holds equitable title to the asset.

Guardian and Ward

When a minor has no parents who can serve as natural guardians, a guardian is appointed. In this type of fiduciary relationship, the guardian is responsible for decisions related to the education, wellbeing, and care of the minor. He or she also takes legal responsibility for the minor’s actions. In some cases, parents may petition to become guardians of adult children with disabilities who can’t care for themselves.

Principal and Agent

Principal and agent relationships occur when an individual or corporation appoints an agent to act on their behalf without conflict of interest. For example, shareholders may elect management to run day-to-day operations, or investors may choose fund managers to handle their assets.

Attorney and Client

Fiduciary duties between an attorney and client are strictly defined by the United States Supreme Court. Lawyers must not divulge what a client has told them in confidence, and their actions must be completely fair and loyal to the client. For example, an attorney may be obligated to provide a client with all alternatives in a legal dispute, despite their own strong bias for or against a course of action.

Doctor and Patient

Doctors aren’t allowed to share a patient’s medical information with anyone else without permission. Mental health professionals can’t have a sexual relationship with their patients because it is considered both a legal and ethical conflict of interest.

Although it can be difficult to define fiduciary roles, the position is one of utmost trust. Fiduciary relationships are generally entered into through legal contract or business relationship, but may extend to family members under certain circumstances. Ultimately, each type of relationship is defined in the court system on a case-by-case basis.

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