A fiduciary is any party having a fiduciary responsibility to a second party that has some kind of duty to protect the interests of that second party. In legal situations, a fiduciary is generally an executor, trustee, financial advisor or guardian who exercises primary control over the second party’s property or assets.
When acting as a fiduciary for a second party, you are sometimes required to obtain a fiduciary bond, or it may be in your best interest to do so before you are allowed to serve as fiduciary. Fiduciary bonds themselves are sometimes referred to as probate bonds, guardianship bonds or executor bonds, depending on the legal relationship between the two parties.
How do fiduciary bonds work?
Fiduciary bonds pay the amount of a claim made against a fiduciary if the fiduciary undergoes some breach of responsibility. As an example, should the fiduciary commit fraud or embezzle assets belonging to the party being protected, the bond would limit the loss incurred by the estate or the trust.
The surety company would then have the option of pursuing the fiduciary to recover that amount if the fiduciary can be located and brought to justice. Claims in such cases can be related to intentional acts committed by fiduciaries or careless or incompetent acts that cause a significant loss of assets. To ensure that the assets are adequately protected, the amount of the bond is generally set equal to or higher than the amount of the assets under his control.
What is a fiduciary bond and when is it needed?
State laws will determine the fiduciary bond requirement in any legal case. Most commonly this pertains to probate actions, and many states require that the executors post a bond for such probate actions. If a person dies without preparing a will or fails to include a waiver of bond requirements in the will, this bond will generally be necessary. It’s also possible for the state to require a fiduciary bond even if the decedent has specifically included a clause in the will that waives the need for this bond.
Fiduciary bonds are sometimes also requested by creditors or beneficiaries who may be concerned about the honesty or loyalty of a given fiduciary. Instead of having them removed from their post, it is very common to request the court to require a fiduciary bond, to ensure that they carry out his or her responsibilities appropriately.
The court may also impose a fiduciary bond requirement when it considers something in the background of the fiduciary to be suspect or questionable in terms of their ability to administer the assets of an estate. Cases, where the fiduciary is generally not required, are those in which corporate entities are involved such as banks or trust companies because these entities would be able to pay back funds lost due to negligence.
The other case where these are not generally required is in a situation where the main assets being passed on are real property since there is very little chance that the property can be stolen. This is also the main reason that courts do not include the value of real property in the cost of these bonds.
How much do fiduciary bonds cost?
Just as states generally determine when a bond is needed, they also determine the cost of the bond. As mentioned above, the amount of a bond is generally set to be either equal to the value of the estate assets, or somewhat higher. The cost of that bond would then be a percentage of the total assets, so that for instance, estate assets valued at $1 million and with a premium cost of 1 percent, would have a premium cost of around $10,000.
Once the courts have ordered a bond in any given case, the fiduciary will not have access to any of the assets included in the estate, until the bond amount has been paid and the bond has been issued. In practical terms, this generally means that the fiduciary will be required to pay for the bond, and if there is no provision for some other arrangement, that means the fiduciary will be required to bear the cost of the bond. Fiduciary bonds are also generally renewed annually, which means that the longer a person remains as fiduciary over the estate, the more money they will be paying out in premiums.
How do I obtain a fiduciary bond?
The fiduciary is responsible for obtaining the bond. The first step toward is to contact a surety company authorized to fiduciary bonds in your state. An application form will be provided to the would-be fiduciary, and after completing it, a surety company will check the background of the potential fiduciary, as well as their credit circumstances. NFP can help you with all your bonding needs.
If the potential fiduciary meets underwriting requirements for the bond, the bond will be issued. As you might expect, the higher the bond amount, the more meticulous the background check will be. If they do not pass the background check, no bond will be issued. Knowing this, anyone who nominated to be a fiduciary in the legal affairs of another party, who knows that they cannot pass a financial credit check or other background checks (due to a bankruptcy or criminal record), would be well advised to decline the fiduciary position beforehand.
In cases where a considerable amount of money is involved, and a more detailed background check will be performed by the surety company, it will often take several months before a bond can be issued. This means that anyone nominated as a fiduciary should immediately begin the process of applying for a bond, with the expectation that it will be several months before a bond can be approved and issued.