You may have heard the term “breach of fiduciary duty” and wondered exactly what it means. From the context, you could probably discern that it involved some misconduct on the part of a person in a position of trust, and you were probably correct. Breaches of fiduciary on a large scale, especially intentional or egregious ones, often make the news. But you don’t have to be a bank officer who embezzles millions to commit a breach of fiduciary duty—and you don’t even need to intentionally do wrong. What is a breach of fiduciary duty, and how does someone avoid committing a breach?
What is a Fiduciary?
In order to know what constitutes a breach of fiduciary duty, it’s necessary to first understand what a fiduciary is. A fiduciary is a person or entity who is obligated to act in the best interests of another party. That can take many forms, from the treasurer of an elementary school PTA who manages the organization’s funds, to the CEO of a large corporation who must accurately represent the company’s financial health to shareholders.
Common examples of fiduciary relationships include:
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The executor – called personal representative in Michigan – of a deceased person’s estate, who is obligated to manage the estate for the benefit of heirs and beneficiaries
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The trustee of a trust, whose job is to manage trust assets and distribute them appropriately to the beneficiaries of the trust
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An agent, or attorney-in-fact, acting pursuant to a power of attorney
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The guardian or conservator of an incapacitated person (ward) who is responsible for ensuring the ward’s well-being and/or managing their finances. In Michigan, a guardian makes decisions about the ward’s living situation, medical care, and other personal matters; a conservator has control of the ward’s finances.
Lawyers are fiduciaries with respect to their clients; registered investment advisors also have a fiduciary duty to the clients they advise. There are many other examples of fiduciary relationships. In short, if someone has a legal or ethical duty to put someone else’s interests before their own, they are likely a fiduciary.
What Constitutes a Breach of Fiduciary Duty?
Breach of fiduciary duty can take many forms; some are obvious and intentional, others less so. If you are serving as the personal representative of an estate, the trustee of a trust, agent under a power-of-attorney, or the guardian or conservator of a vulnerable person, you need to know how to avoid breaching your duties. Here are some common breach of fiduciary duty examples.
Misappropriation of Assets
Misappropriation of assets means taking or using assets that do not belong to you for your own benefit. This may be one of the most common types of breach of fiduciary duty, because it can take many forms. Paying your own bills out of a ward or conservatee’s bank accounts (even if you fully intend to pay the money back) is a misappropriation of assets. Another example of misappropriation is a personal representative of an estate who sells antiques from the estate and pockets the proceeds. Embezzlement from an estate, trust, or ward’s bank account, or overpaying yourself for your services to a trust or estate, also constitute misappropriation of assets.
Conflict of Interest
As a fiduciary, you are supposed to put the interests of others before your own. That can be more difficult to do when you have an incentive to take actions that could benefit yourself. Let’s say that, as trustee, you are considering two possible investments on behalf of the trust you are administering. One of the two would result in your spouse receiving a significant commission. While it might be permissible to make the investment that would also benefit you and your spouse, you are ethically obligated to disclose the conflict of interest. In other words, it is not necessarily a breach of fiduciary duty to have a conflict of interest, but it is a breach to fail to appropriately manage and disclose such conflicts.
Self-Dealing
Self-dealing means taking actions that benefit you or someone else at the expense of the people to whom you owe a fiduciary duty. For example, if you were the conservator for your disabled cousin, you might have the authority to invest his assets. If you choose to invest them in a speculative business of which you are part-owner, that would be self-dealing, especially if you failed to disclose the conflict of interest.
Negligent Management of Assets
As the name implies, negligent management of assets doesn’t require bad intent—just a failure to manage assets with the level of skill and care that a reasonable person in a similar situation would exercise. For example, failing to pay property taxes on a piece of investment property belonging to an estate, causing the property to be sold at tax sale and lost to the beneficiaries, would be negligent management of assets. Another example would be failing to collect rent or debts due to an estate.
Inadequate Record-Keeping or Failure to Account
As a fiduciary, you are not only required to responsibly manage assets for another’s benefit, you are obligated to keep adequate records and communicate important information about an estate or trust to beneficiaries. You may be required by law or the terms of a trust document to provide regular accountings to the court and/or beneficiaries. If you are a guardian or conservator, you have similar obligations to your ward or conservatee. Even if you have managed assets properly, poor recordkeeping or communication could lead to allegations of misconduct or an inability to prove that you have acted appropriately.
Failure to Distribute Assets
If you are obligated to distribute assets to a beneficiary, such as at the closing of a deceased person’s estate, and you fail to do so or delay the distribution unreasonably, that may also constitute a breach of fiduciary duty.
Preventing Breaches of Fiduciary Duty
Committing a breach of fiduciary duty, even inadvertently, can carry consequences such as dismissal from your role and personal liability. If you are serving as a trustee, personal representative, attorney-in-fact, guardian, or conservator, one of the best ways to ensure that you do not breach your duties is to have sound, experienced legal counsel.
Many fiduciaries have not served in that capacity before and may not fully understand what is expected of them. A skilled probate attorney can both advise the fiduciary and, in the event there are allegations of a breach of fiduciary duty, defend them in court.
To learn more about breaches of fiduciary duty and how to avoid them, speak with an experienced probate attorney. The knowledgeable attorneys at Barron, Rosenberg, Mayoras & Mayoras work with fiduciaries as well as with beneficiaries who need to make a claim against a fiduciary. Schedule a consultation today by calling (248) 213-9514 in Michigan or (941) 222-2199 in Florida to learn how we can assist you.
This article was provided by Don L. Rosenberg, Co-Founder of the Law Firm of Barron, Rosenberg, Mayoras & Mayoras, one of Michigan’s TOP Elder Law & Estate Planning Law Firms. Attorney Rosenberg and his firm are Members of the National ElderCare Matters Alliance and have a Featured Listing on ElderCareMatters.com – America’s National Directory of Elder Care / Senior Care Resources to help families plan for and deal with the issues of Aging.
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