What is a Fiduciary?

The caregiving and supporter role often arises out of crisis. A loved one becomes disabled, or worse, unexpectedly passes away. It’s natural for family members and friends to want to help, but it’s also important to consider the legal obligations underpinning these roles.

Defining “Fiduciary”

Fiduciary roles often arise out of legal documents and relationships such as a trustee or executor under a Will; the parent-child relationship; spouses; and business partnerships. But did you know that a fiduciary role can arise out of an informal relationship as well? These informal relationships, or “confidential” relationships can occur by simply undertaking to act on behalf of another person. This is especially true in relationships where one person is more vulnerable due to disability, and is relying on the other person to assist, or act on their behalf.

Consider, for example, an aging parent who is starting to have failing health and memory problems. They may begin looking to their adult child to assist them with making certain life decisions or engaging in every day transactions. They may need them to start accompanying them to doctors’ appointments and be their “surrogate” when interacting with third parties concerning billing matters or scheduling. In such a situation, there is no doubt that the adult child who engages to assist this parent has become a “fiduciary”. Even an informal fiduciary such as this has legal responsibilities, and correspondingly, personal liability if they fail.

The Legal Responsibility of a Fiduciary

In formal fiduciary relationships, the legal responsibilities of the fiduciary are clearly defined in the legal document under which they arose. For example, an agent acting under a valid Durable Power of Attorney need look no further than the signed document to know what is expected of them. The Texas statutory form even includes a two-page explanation of fiduciary duties and the liability of the agent for breach of those duties.

But what about the example of the adult child helping the disabled parent? What if the parent did not have any formal estate planning documents in place before they became ill? As it turns out, they owe similar fiduciary duties to the aging parent just as a legally appointed agent under a valid legal document. These general duties include: (1) duty of loyalty and utmost good faith; (2) duty of candor (being open and honest); (3) duty to refrain from self-dealing; (4) duty to act with integrity; (5) duty of fair, honest dealing; and (6) duty of full disclosure (being transparent in decision-making). With duties like this, the informal fiduciary may want to consider how to make the relationship more formal to insure their acts are protected.

How to Legalize an Informal Fiduciary Relationship

Informal relationships can be formalized through proper legal planning. This can include making estate planning documents such as power of attorney documents where the individual appoints a legal “agent” to act on their behalf. However, such documents are dependent on the individual having the mental capacity to understand what these documents mean. But what if the individual is disabled and has lost this capacity?

In cases where the disabled individual lacks mental capacity to create legal documents, a legal proceeding called a guardianship, may be necessary. In a guardianship, a court can appoint someone to act on behalf of the disabled individual for healthcare and residential decisions as well as financial decisions. These are one-time legal proceedings that offer the fiduciary better legal protection as they instill the guardian with full legal authority to act on behalf of the disabled individual. Guardianships are also supervised by the court, creating accountability as it concerns the fiduciary duties owed to the disabled individual.

Whether a fiduciary role has arisen out of a relationship is very fact specific. Before undertaking to act on behalf of another, it’s important to be advised as to the legal role and responsibility, and potential personal liability.

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