The probate court appointing the fiduciary will determine whether or not to require a fiduciary bond. When one is required, it’s usually in an amount that’s equal to the value of the assets under the fiduciary’s control. The bond must remain in force for the duration of the fiduciary relationship.
Fiduciary Bonds
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What Are Fiduciary Bonds?
A fiduciary relationship exists when one person has been granted the authority to manage assets belonging to someone else. For example, the estate of a deceased person or the assets and income of a minor or incapacitated adult. Fiduciary duties are conferred by a probate court, which is why fiduciary bonds are also called probate bonds. In many cases, the fiduciary is a family member or has some other connection to the person whose assets he or she will be managing. However, the fiduciary could also be an accountant, attorney, or some other professional chosen by the court.
In either case, the probate court must approve the appointment. One requirement for that approval usually is the purchase of a fiduciary surety bond. A fiduciary bond is a fiduciary’s pledge to carry out all fiduciary duties in accordance with the law and with the best interests of the other person at the forefront in making decisions. It protects the person against financial loss stemming from the unlawful or unethical action of the fiduciary.
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How do Fiduciary Bonds Work?
There are three parties to the surety bond agreement for a fiduciary bond, known in the language of surety bonds as the obligee, the principal, and the surety:
- The obligee (the party requiring the bond) is the probate court
- The principal (the party required to purchase the bond) is the fiduciary
- The surety is the company underwriting and issuing the bond
Most fiduciaries are conscientious about acting in the best interest of the person whose assets they’re managing. But there are a few bad apples in every barrel, and embezzlement, theft, and misappropriation of funds do occur. More often, a claim is the result of a fiduciary exercising poor judgment and making unwise decisions, such as investing the funds of an incapacitated retiree in an aggressive, high-risk growth stock.
Upon receipt of a claim, the surety will investigate it and determine whether it should be paid. The terms of the surety bond agreement make the principal solely responsible for paying any valid claim against the bond. But most often, the surety will pay a claim on behalf of the principal, which creates a debt that the principal is legally obligated to repay.
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What Do They Cost?
Character counts in the view of the surety when underwriting a fiduciary bond. So does the principal’s creditworthiness. The single most influential factor in determining the premium rate is the principal’s personal credit score, but underwriters will also consider financial strength. They may even perform a background check.
A principal deemed creditworthy and unlikely to do something that would result in a claim should qualify for the lowest premium rate, possibly as low as 1% of the full amount of the bond.
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