What is a Fiduciary Relationship?

What is the relationship between a trustee and his beneficiary? A trustee is a person or an institution that is entrusted with the responsibility of managing the assets of the beneficiary, in the best interests of the latter.

The trustee is made the legal owner of the property, through creation of a trust fund. The beneficiary lacks the legal title to the property, but the trustee has to administer the same, in the interests of the beneficiary.

In short, the trustee should not have any personal interests in the property, but the beneficiary can enjoy the benefits from the property, without being its technical owner. The relation between the trustee and the beneficiary is a fiduciary relationship. In this case, such a relationship is created by law. However, there are many instances, wherein such relationships form on an ethical basis, like in case of attorneys and clients.

Let us analyze the examples given above. One is between the trustee and the beneficiary and the other is between the attorney and client. In the first case, the relation is created by law, and in the second, there is no such legal binding. However, there is a common factor in both these relations. One is the trust and confidence of the beneficiary in the trustee/client in the attorney.

On the other hand, the trustee/attorney must act for the best interests of the beneficiary or the client respectively.

So a fiduciary relationship can be defined as a legal or ethical relationship, wherein one party, called the fiduciary is required to act in the best interest of the other called beneficiary or principal, who reposes his/her confidence and trust on the former.

Some of these relationships, as those between the trustee and the beneficiary, legal guardian and ward, conservator and ward, etc., are legally created. There are many other fiduciary relationships that are formed on an ethical basis.

They include relation between doctor and patient, attorney and client, teacher and student, real estate broker and buyer, financial adviser and client, etc. In case of relationships that are formed on an ethical basis, there is no contract or legal binding, but in case of disputes, court may declare that a fiduciary relationship existed between the parties.

Apart from those mentioned above, there exists a third category, wherein relations form on the basis of years of trust and confidence. Such faith could arise out of longstanding personal or social relationship. This is commonly seen in between relatives (like brother and sister), friends, business associates, etc.

Such relations are called confidential relationships. Though both the terms are used interchangeably, they are actually different. However, the degree of good faith expected from the parties should be the same in both cases.

In some of the legally created fiduciary relationships, the fiduciary is required to file a fiduciary bond or probate bond, so as to guarantee the performance of obligations towards the beneficiary, in a faithful and loyal manner. In such cases, the beneficiary can sue the fiduciary, in case of a fraudulent conduct, breach of duty, or taking undue personal advantage from the position as a fiduciary.

In such cases, if the beneficiary proves his/her claims, then the fiduciary may be required to pay damages. Even in case of fiduciary relationships that are based on ethics and conscience, the beneficiary may sue the fiduciary. The beneficiary has to prove an existing fiduciary relationship and a breach of fiduciary duty. If these claims are established, the fiduciary will be accountable for breach of fiduciary duty.