(February 2023)
Fiduciary bonds protect parties that have a financial interest in an estate or in property involved in proceedings such as bankruptcy, conservation, or liquidation. Interested parties may be heirs, children, incompetents, creditors, or other beneficiaries. The most familiar fiduciary risks are administrators, executors, guardians, and trustees. The fiduciary is the principal and may be an individual or an institution. The fiduciary's faithful performance of duty is not considered a high-risk obligation if it receives the assistance of legal counsel and court supervision in estate matters. However, company bond underwriting specialists carefully examine significant amounts of information developed in applications or inquiries. The supervising court usually establishes the required amount of the bond penalty.
Besides being honest and intelligent, fiduciaries should also have adequate experience in business management to handle their responsibilities. A fiduciary must diligently assemble a trust estate's assets and then pay any valid estate debts as the applicable court, will, or trust deed requires and then distributes all remaining funds. The fiduciary must strictly adhere to the laws that govern estate administration at all times. Ignorance of the law does not absolve the fiduciary from liability. Failing to perform any required obligations requires compensating the party that sustains a loss, regardless of whether the default is due to dishonesty or to error.
These are the most common and most important fiduciaries. Their functions are similar, but the way they become fiduciaries is different. A will usually names a person as executor. Either a statute or a court names an administrator and defines its duties. The administrator or executor's duties in administering an estate are basically as follows:
There are obvious pitfalls in completing each of these duties, especially if the administrator or executor is inexperienced, careless, or unaware of the duties. Without a bond, beneficiaries do not have anybody to look to for redress except the fiduciary.
Trustees derive their authority from the instruments that created the trust. The trustee's general duties under either a will or a deed are for safekeeping and segregating assets. Another especially important duty is to invest and reinvest trust funds. Trustees must strictly observe the trust instrument’s terms for their protection and the estate's protection. If there are questions or concerns, court orders should be obtained before making any decisions. If the instrument that created the trust does not specify the nature of the estate's investment securities, the trustee should examine the statutes for guidance to determine the type of securities in which to safely invest.
Guardians, committees, tutors, curators, conservators, and similar or comparable groups are types of trustees. Guardians have the same investment problems as trustees. They are usually held to a higher standard of accountability than the typical trustee because government entities are concerned about children and unfortunates. In general, securities approved for investment by trustees are acceptable as investments by guardians. Guardians should not invest in unapproved securities. If laws do not address approved or appropriate types of investments, court orders should be obtained before making any investments.
Receivers in bankruptcy proceedings are appointed after the creditors of the allegedly bankrupt party file petitions. Receivers have a short term of office. They take possession of and preserve the assets of the bankrupt party until the creditors meet to elect a trustee. Trustees are directly supervised and guided by the referee in bankruptcy proceedings. The referee is an officer of the court and supervises the trust to the extent of countersigning checks that the trustee draws.
Sellers of real estate may be special commissioners, trustees, or attorneys. Their terms of office are relatively short. After making the sale, the trustee or commissioner accounts for the proceeds. Real estate bonds for guardians, trustees, administrators, or executors are different because the proceeds from the sale become part of the trust and must be administered accordingly. Bonds for such fiduciaries continue until the trust expires.
It is a statutory requirement that an administrator or executor be bonded, although testators frequently direct (and the law permits) executors of wills to qualify without bond. This is unusual because it should be clear that the estate that took years of painstaking work to build up might be ruined by the actions of an inept, careless, or dishonest fiduciary without the safeguard of a bond.
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Example: Adam names his son, Bruno, as the executor of his estate. His will specifically states that a bond is not required. Bruno was a lawyer and an accountant when Adam made his will. However, Bruno has encountered a number of difficulties during the past five years and has tried to solve his problems with drugs and alcohol. Bruno has complete control of the estate when his father dies. His family is very concerned about how Bruno will handle disposing of the estate. However, because there is no bond requirement, there is little recourse outside of a lawsuit if Bruno does not fulfill his fiduciary responsibilities. |
Fiduciaries are prohibited from using trust funds for their own benefit. If a fiduciary diverts trust funds, the bond is liable for any loss the estate sustains. While embezzlement losses may not appear until years later, the surety is liable on its bond only until the statute of limitations expires.
The fiduciary's duties always include the obligation to account for the trust estate's assets and to show that it has made only legal disbursements. When the trust terminates, the fiduciary must distribute the account balance to those legally entitled to receive it. The bond protects the beneficiaries against loss through improper disbursements, even though the fiduciary made them in good faith.
Fiduciaries are required to conserve the estate. Doing so may include the duty to invest its assets to yield income. The laws of each state outline the duties and liabilities of such fiduciaries with respect to conservation and investments. The bond covers the principal's liability resulting from failure to comply with any requirements.
Fiduciary bonds are written on behalf of persons the court appoints or by a will or deed of trust to take possession of an estate or property, to manage and control it, and to finally account for, transfer, or distribute it as the law requires. The fiduciary is an agent of the court and is simply the avenue the court uses to exercise custody.
Fiduciary bonds are statutory in nature. While they may differ in detail from one jurisdiction to another, they all basically guarantee that the principal will faithfully and properly perform its duties as the law requires.
The term fiduciary is generic because there are many types of fiduciaries with different functions and responsibilities. Fiduciary bonds are tailored to meet the requirements of a variety of duties, and state laws and the courts sanction them.
Each jurisdiction establishes laws that detail fiduciary duties and responsibilities. In addition, fiduciaries must comply with all lawful orders issued by the court that has jurisdiction over those responsibilities. A fiduciary bond covers loss that results from any failure to faithfully perform such duties or comply with such orders. There are seven groups of bonds in the fiduciary classification.
These are bonds in estates of deceased persons or persons presumed dead based on a long absence.
These are bonds in estates of legal incompetents.
These are bonds in estates of minors.
These are bonds in trust estates under a will or deed.
These are bonds filed in United States District Courts under bankruptcy laws.
These are bonds filed in courts of equity or courts that exercise equitable jurisdiction. They include equity receivers, liquidators, trustees, and other parties the court appoints to manage or liquidate property.
These are bonds of conservators or liquidators of financial institutions and others that do not fall into any of the categories above and whose principals may or may not be subject to a court's jurisdiction.
The analysis to this point has primarily addressed items of a general nature. Those interested in corporate suretyship, and specifically judicial suretyship, should be familiar with the types of Fiduciary bonds that encompass various types of official obligations.
For example, two classes of Fiduciary bonds can be categorized according to the functions and duties of the fiduciaries. They are:
The following are examples of fiduciaries whose duties fall in the short-term category.
This fiduciary is appointed when temporarily administering an estate is required, pending probate of a will or appointing a general administrator.
This fiduciary is subordinate to the general administrator. It is appointed to collect assets in a state other than the deceased's legal domicile at the time of death.
This fiduciary is appointed to collect and preserve goods likely to be lost if regular probate or administrative proceedings cannot commence immediately for any reason.
This fiduciary is appointed in cases where the deceased made a will, but either did not name an executor or named one who was unwilling or unable to serve.
This fiduciary is appointed to complete the administration if the office of administrator becomes vacant before the estate is settled.
This fiduciary is appointed to complete the duties of an executor or administrator who dies or fails to close the estate for any reason.
This fiduciary is appointed to sell real estate to pay the estate's debts.
This fiduciary is appointed to handle the estate during periods of litigation.
Every partnership is dissolved when one of the partners dies unless there is an express agreement or contract to the contrary. The surviving partner is responsible for winding up the partnership promptly, collecting all funds owed to the partnership, and acting as a fiduciary. In some states, the survivor is required to give a bond that guarantees its faithful performance of these duties.
The courts appoint Receivers in Equity to take possession and control of property that is the subject of litigation and to dispose of it as the court directs.
Receivers in bankruptcy liquidation collect the assets of the bankrupt estate and hold them until a trustee in bankruptcy is elected. They do not make any distributions to creditors. This receiver turns over all assets to the trustee elected.
This type of bond is needed when a debtor cannot pay its creditors. Based on an arrangement with its creditors, the debtor may convey all of its property to a third party or assignee, whose duty is to convert the property into money immediately and to then pay the debts to the extent possible.
Long-term bonds are for fiduciaries whose duties are expected to extend over longer periods of time. Their appointment includes both collecting and disbursing assets and conserving and investing them. The investment aspect makes them long-term. The following are examples of fiduciaries whose duties fall in the long-term category:
These fiduciaries care for and manage the estate of a minor, invest the estate funds in such securities as allowed by law, make reasonable expenditures for the minor's education, support, and maintenance (preferably under a court order), and file accounts with the court.
The names in this category vary but their duties and responsibilities are basically the same as in the category above.
These fiduciaries are named in the deceased's will to preserve and manage the trust estate as the will's provisions require.
If the testamentary trustee dies, resigns, or fails to act for any reason, the law does not permit the trust to fail for lack of a trustee. In these cases, the court appoints a trustee to administer the trust under the will's provisions.
Bonds that cover this type of fiduciary usually do not come directly under the court's jurisdiction. This is because the trust was created during the individual's lifetime and is a completely private arrangement. Court action is not needed unless there are questions of interpretation or proper administration.
When underwriting a fiduciary bond, the surety focuses on the following issues:
The surety underwriter must evaluate the principal, attorney, and the estate involved when considering a request for a Fiduciary bond.
The applicant or principal's integrity, business capacity, and financial worth are considered. Any questions about the applicant's honesty result in a declination. The importance of business capacity is directly proportional to the amount of assets to be handled and the scope of duties to be performed. For example, a person with limited business capacity can satisfactorily administer a simple estate, but a lawyer, banker, accountant, or extremely successful businessperson should be capable of handling a larger or more complicated estate. Successful professionals accustomed to dealing with large sums of money and investments are usually competent, dependable, and less inclined to be tempted by a large amount of money or extensive assets. On the other hand, joint control may be required to obtain a bond if there are questions about any of these considerations.
The qualifications of the principal's attorney must also be considered. Handling an estate may involve legal issues and technicalities that require a capable lawyer's services. A risk is more desirable when a highly competent attorney closely supervises its administration.
The circumstances and conditions of the estate itself must be thoroughly examined and completely understood. Whether the exposure is short term or long term, the nature of the assets and liabilities, the number of heirs or beneficiaries (and where they are located), whether trusts have been created under a will, and the date of death or the date that ward status was created are important considerations. If trusts were created, the surety must know if they will be conducted under its bond or if their liability will be terminated with respect to them. If the date of death or creation of ward status was not recent, the surety must know where the assets are located and the party or parties that have custody of them.
An attorney-in-fact for the insurance company is the only person who may place a Fiduciary bond in force. The risks involved in underwriting such coverage require specialized knowledge and experience. Underwriting authority is usually limited to the bonding company's underwriters but may be delegated to selected agents up to certain limits or amounts.
Fiduciary bonds are always subject to a completed application. It does not necessarily have to be completed in advance when the attorney-in-fact is present at the court or another place where the bond is filed. In other cases, the application is submitted to the surety to issue the bond. The information provided in the application must be accurate, and the person being bonded must sign it.
A properly completed application sometimes reveals unusual or important information that requires additional consideration. For example:
The bonding company may require joint control agreements as a condition before it issues the bond. Widows and widowers may find themselves in a fiduciary capacity and not have the business experience needed to do the job. The surety may require joint control in those cases. All cash and securities must be deposited in a specific bank or trust company. Only checks that the surety on the account signs are honored. If the estate involves securities, the surety may require that the bank sign a safe deposit box joint control agreement. This means the surety must accompany the bonded party to gain access to the safe deposit box.
Joint control agreements provide safeguards that are advantageous to inexperienced fiduciaries. The surety ensures that the assets are handled properly and helps the fiduciary perform its legal obligations. Joint control makes it possible to bond otherwise unacceptable risks. Guardianships that involve surviving parents and minor children almost always require joint control because the child’s share might become unidentifiable from the parent’s share. Sureties frequently help fiduciaries discharge their obligations according to statutes and court orders. This is usually in the form of joint control of the estate's assets.
Joint control is an arrangement where the fiduciary and surety control the estate's assets. It also requires the fiduciary sign all checks, and the surety countersigns them through its authorized representative. Joint control is written acknowledgment that both the fiduciary and the surety consent to and the depository bank that holds the estate's assets acknowledges. Both the fiduciary and the surety must be present to gain access to the safe deposit box that contains the estate's securities.
Joint control is not a reflection of the fiduciary's integrity. On the other hand, it cannot guarantee that dishonesty will not occur. However, it is the safest and fairest way to execute many of these bonds. It provides reasonable assurance that the fiduciary will perform its duties according to applicable laws and statutes. In addition, the records that must be maintained as a result of joint control may be extremely helpful in the final settlement of the fiduciary's account.
Fiduciary bonds cover the faithful performance of duties. They are written for the period needed to administer the trust. They do not have a cancellation clause. Many states do not have a statutory provision to release or discharge a Fiduciary bond until the administration has fully run its course and an accounting is provided.
The fiduciary does not have to actively mismanage or commit fraud for a bond to be forfeited. Negligently doing nothing may also be a valid cause of forfeiture. Misfeasance, malfeasance, and nonfeasance impose equally serious responsibilities on the fiduciary. The fiduciary's failure to act when action is necessary may place the surety in an embarrassing position.
If the fiduciary deposits funds directly into its personal account, it becomes an absolute guarantor of the funds. The surety is forced to pay if the fiduciary dies, declares bankruptcy, or becomes indebted. This is the reason an estate’s funds must be segregated. The Fiduciary bond is not intended to cover a depository hazard. All that a surety proposes to do (and all it is required to do by issuing a Fiduciary bond) is to warrant that the trust will be administered honestly and faithfully according to the laws of the applicable jurisdiction.