What is a Fiduciary Bond?
In order to understand fiduciary bonds, it is first necessary to understand what a fiduciary is, which is any party having a fiduciary responsibility to a second party, and who 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 They Work:
Fiduciary bond requirements by the surety company which issued the bond to pay the amount of a claim made against a fiduciary, in the event that the fiduciary undergoes some breach of responsibility. As an example, should the fiduciary commit fraud fraud or embezzlement of the assets belonging to the party being protected, the bond would limit the loss incurred to 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 are not limited to intentional acts committed by fiduciaries, but can also be made when it is apparent that careless or incompetent acts have been committed by the fiduciary which have caused 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 & When a fiduciary mind as 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 impose the requirement of a fiduciary bond even if the decedent has specifically included a clause in the will which 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 a fiduciary removed from his/her post, it is very common to request the court to impose the requirement of a fiduciary bond, in order to ensure that the fiduciary carries 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 a 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 which were lost due to negligence.
The other case where a fiduciary is bond is 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.
Cost of these bonds:
Just as states generally determine when a bonds as 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%, 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 he/she will be paying out in premiums.
The onus for obtaining a bond is always placed on the fiduciary himself. The first step toward acquiring a getting your bond is to contact a surety company which is authorized to issue them in your state. An application form will be provided to the would-be fiduciary, and after filling that out and completing it, a surety company will check the background of the potential fiduciary, as well as their credit circumstances. Surety by NFP can help you with all your bonding needs!
If the potential fiduciary meets underwriting requirements for the bond, the bond will then be issued. As you might expect, the higher the bond amount involved, the more meticulous will be the background research conducted on a given fiduciary. If the potential fiduciary does not pass the background check, no bond will be issued. Knowing this, anyone who has been nominated to be a fiduciary in the legal affairs of another party, who knows that he/she cannot pass a financial credit check or other background check, would be well advised to decline the office of fiduciary beforehand.
Potential fiduciaries who have declared bankruptcy in the past, or who have criminal records would probably not be approved for a fiduciary bond, and might better decline the office when requested. In cases where a considerable amount of money is involved in the assets, and a more detailed background check will be performed by the surety company, it will often take several months to complete a background check 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.