Imagine being entrusted with a loved one’s finances or overseeing a significant estate. It is an honor, but also a huge responsibility.
A fiduciary bond is a form of insurance often ordered by the court to protect the financial well-being of beneficiaries. It acts as a guarantee that you, the fiduciary, will perform your duties ethically and in accordance with state law.
And if you don’t, the beneficiaries of the estate or trust will not lose money as a result of your misconduct or negligence.
In this guide, we dive into the world of fiduciary bonds, including what they are, how they work, who needs them and how much they cost.
What is a fiduciary bond?
A fiduciary is a person who is entrusted with the task of acting in the best financial interests of another person. This requires the fiduciary to put the beneficiary’s needs above their own.
A fiduciary bond is insurance designed to protect a beneficiary against breaches of this fiduciary duty. It essentially provides financial protection to all parties involved and acts as a safeguard in case the fiduciary fails to fulfill its obligations.
In probate court, where a deceased person’s assets are settled, a fiduciary bond is often imposed by a judge to ensure that the executor does not mismanage or embezzle the estate.
Fiduciary bonds may also be called probate bonds, guardianship bonds, or executor’s bonds.
How does a fiduciary bond work?
To better understand how a fiduciary bond works, look at this example.
Imagine a trustee overseeing a significant estate. The trustee is required to manage the assets responsibly by following the terms set forth in the trust. However, if the trustee engages in fraudulent activity, such as embezzlement, the fiduciary bond comes into play.
If the estate loses $100,000 as a result of the trustee’s misconduct, the fiduciary bond – which is typically set at an amount equal to or greater than the assets within the trust – would cover the losses. The company issuing the bond could then take legal action against the trustee to recover losses.
Claims covered by fiduciary bonds range from intentional misconduct to acts of negligence or incompetence. This way, even if money is mismanaged due to simple human errors, beneficiaries are protected.
Another example occurs during the probate process. Suppose one of your parents has died and named you executor of their will. The court may require you to obtain a fiduciary bond equal to the size of the estate before you can distribute assets to beneficiaries.
If you make an accounting error or unintentionally commingle funds, beneficiaries are still financially protected.
Who Needs a Fiduciary Bond?
In some cases, a fiduciary bond is required by law, such as in some legal proceedings. Other times, beneficiaries may apply for a fiduciary bond to provide an extra layer of protection in situations where someone else might be responsible for managing their money.
A court will often require a bond if the chosen fiduciary has a checkered financial history, or if there are other concerns about the fiduciary’s ability to manage assets.
Getting approval for a fiduciary bond can take several months. The process of obtaining one is similar to applying for a loan. Bonding companies assess your financial reliability and background before making a decision.
If you are considered a financial risk, securing a fiduciary bond may be difficult, perhaps due to a recent loan rejection. Likewise, a criminal record or previous bankruptcy can also make the approval process challenging. In these cases, it may be wiser to decline the fiduciary role before applying for a bond.
Types of Fiduciary Bonds
Each type of fiduciary bond serves a different purpose. These are the most common types:
- Executor bond
- Required in probate cases to ensure that the executor of an estate carries out his duties – such as distributing assets to beneficiaries – in accordance with state law and the wishes of the deceased.
- Guardianship bond
- Appointed to people responsible for the welfare and finances of a minor or an incapacitated person.
- Conservatorship bond
- Similar to a guardianship bond, but specifically focused on financial matters.
- Trustee bond
- Ensures that a trustee properly manages a trust according to its terms. It provides financial protection to the beneficiaries of the trust.
Costs of a fiduciary bond
The cost of a fiduciary bond varies by state. The exact cost depends on the type and amount of assets controlled by the fiduciary, the jurisdiction in which the bond is issued, and the company issuing the bond.
Generally, the bond amount is equal to the value of the estate’s assets, or slightly higher. The cost of the bond is usually a percentage of the total assets.
For example, if an estate’s assets are valued at $100,000 and the premium cost is 1 percent, the bond costs $1,000. Typically, the fiduciary pays the costs of the bond.
It is important to note that once the court orders a bond, the fiduciary will no longer have access to the assets in the estate until the bond amount is issued and paid. Fiduciary bonds often renew annually, so the longer someone serves as a fiduciary, the more he or she will pay in premiums for the bond.
In short
Fiduciary bonds are often imposed by the court and serve as yet another hidden cost in an already expensive and lengthy process.
If you need to obtain a fiduciary bond, it is a good idea to seek professional advice. A financial advisor can help you navigate the process of obtaining the bond, answer estate planning questions, compare rates from different bond companies and ensure you purchase the right amount of coverage.
Use Bankrate’s financial advisor matching tool to find a certified financial planner near you.
