Summary: Fiduciary bonds guarantee that persons entrusted with the care of property of others under various forms of estates will exercise their duties faithfully, account for all property received and make good any deficiency for which the courts—probate or equity—hold fiduciaries liable.
Fiduciaries—Classes of Bonds
The word “fiduciary” is the generic term for persons or legal entities such as executors, guardians, and trustees appointed by the court, under a will or by a trust, for the purpose of managing, controlling, or disposing of property of others. These persons or fiduciaries are also known as principals under contracts of suretyship.
The majority of fiduciaries are appointed in probate proceedings. It is for this reason that fiduciary bonds are also referred to as probate bonds. The four general areas in which fiduciaries are appointed in probate are:
1. estates of deceased persons or persons presumed dead;
2. estates of minors;
3. estates of incompetents;
4. trust estates.
Estates of Deceased Persons or Persons Presumed Dead
WHEREAS, by an order of the (Probate, District, or Surrogate Court)_____ of the _____ (County, Parish, or Judicial District) _____ of he State of _____, the above bound _____ has been appointed Administrator of the estate of _____ deceased, who died intestate, and Letters of Administration were directed to be issued to said Principal upon the furnishing of a bond according to law in the sum of _____ Dollars ($____).
NOW, THEREFORE, the condition of this obligation is such that, if the said _____ shall well and faithfully execute the duties of said trust according to law, and shall well and truly perform all official duties now required by law, and all such additional duties as may be imposed by any law of the State, and shall account for and pay over and deliver to the persons or officers entitled to receive the same, all moneys or other property that may come into his hands as such administrator.
Analysis
Fiduciaries in this class include executors (those named in wills to settle estates); administrators (those appointed by courts to settle estates of persons who die without wills); and various kinds of special administrators. The duties of the fiduciaries involve collecting, preserving, and distributing assets of an estate according to the terms of a will or by terms specified in a statute.
Estates of Minors or Incompetents
WHEREAS, an Order was made by the _____ Court of _____ County on the _____ day of _____, 20__, appointing the above bounden principal Guardian in the estate of _____ (minor or incompetent) _____ and letters of guardianship were directed to be issued to (him or her) upon (his or her) executioning bond according to law in the sum named.
NOW, THEREFORE, the condition of this obligation is such that, if the said Principal shall faithfully discharge the duties of guardian of such ward according to law. . .
Analysis
Guardians are appointed to administer the affairs of persons under age and considered legally incapable of acting for themselves. There are also special guardians appointed for various specified purposes such as to preserve assets of an estate of a minor during a litigation that delays the appointment of a general guardian.
Conservators, committees and custodians are fiduciaries appointed to take care of assets of others whom the court has adjudged incapable of handling their own property.
Trustees
WHEREAS, by an order made by (District, Surrogate, or Probate Court) _____, the Principal, _____, was appointed as Trustee(s) under the Last Will and Testament of _____, deceased.
NOW, THEREFORE, the condition of this obligation is such that, if the said _____ shall faithfully discharge the duties of (his, her, or their) trust as such trustee(s) and obey all orders of any Court of competent jurisdiction or . . .
NOW, THEREFORE, the condition of this obligation is such that, if the above bounden _____ shall faithfully execute the trust reposed in him as Trustee(s) under the Last Will and Testament of _____, deceased, and obey all lawful decrees and orders of the _____ Court of the County of _____, touching the administration of the trust committed to him. . .
Analysis
Generally, a trust is a fiduciary relationship between a trustee who has equitable ownership in property and the creator of the trust who has legal ownership in the property. The trustee is given the responsibility of performing certain specified duties for the benefit of the trust beneficiaries and the trustee is charged with a high degree of care in carrying out his duties. When a trust is set up to take effect at the death of its creator, it is termed a testamentary trust. When drawn and utilized during the lifetime of the creator, it is an inter vivos trust.
Equity Trusts
KNOW ALL MEN BY THESE PRESENTS, That, Whereas, (Obligee) of _____, has duly constituted and appointed (Individual, Firm, or Corporation) and his (or her) true and lawful attorney under a certain power-of-attorney dated _____, 20__, and has entered into an accompanying trust agreement, under which agreement the Principal on this bond has been appointed as Trustee to carry out and perform the conductions of said trust, and
WHEREAS, the said _____, is required by the terms of said agreement to furnish a bond to indemnify _____, the said Obligee and creator of this trust, against any acts of fraud or dishonesty which said Principal may commit as Trustee while acting under said power of attorney in the performance of said agreement.
NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION IS SUCH, That the said _____ (hereinafter called the Principal) as Principal, and the _____ (Surety) as Surety, hereby bind themselves, their heirs, successors, and assigns to pay unto _____ (hereinafter called the Obligee), such pecuniary loss, not exceeding _____ Dollars ($), as the Obligee shall have sustained by any act or acts of fraud or dishonesty on the part of the Principal, either directly or through connivance with others (excepting, of course, with the Obligee), while performing the duties of said trust, for and during the period beginning _____, 20__ and ending upon termination of this suretyship, as provided below.
THIS BOND IS ISSUED SUBJECT TO THE FOLLOWING CONDITIONS, which are precedent to any recovery hereunder:
1. LIABILITY OF THE SURETY. The liability of the Surety is hereby limited to any act or acts of fraud or dishonesty on the part of the Principal, and does not extend to breach of performance of said trust contract, anything in the power-of-attorney, to the contrary, notwithstanding.
2. LOSS. Loss, if any, shall be covered only in the event that such loss is discovered not later than twelve months after the termination of this suretyship. The Obligee, upon discovery of any facts or circumstances indicating a possible loss hereunder, shall give the Surety immediate written notice thereof, delivered to the Surety at its address in the city of _____, such notice to set forth the name and last known address of the Principal. Within ninety (90) days after the date of such notice the Obligee shall file with the Surety a sworn, itemized statement of loss hereunder. No suit or action of any kind against the Surety for recovery of any claim under this bond shall be sustainable unless the suit is commenced and process duly served within twelve months after the first discovery of any loss hereunder, or any facts or circumstances indicating a possibility of any loss hereunder.
3. TERMINATION. The suretyship hereunder shall terminate as follows:
a. By the Surety, giving thirty days written notice to the Obligee, the Surety refunding the unearned premium as soon as determined.
b. By the Obligee giving written notice to the Surety of its intention to terminate the bond, upon which the Surety shall return the unearned premium, if any, as soon as determined.
c. Upon discovery of any loss or any facts or circumstances indicating a possible loss caused by the Principal.
d. Upon severance of the Principal from the employee of the Obligee as Trustee under said agreement.
IN WITNESS WHEREOF, the Principal and the Surety have hereunto set their hands and seals this _____ day of _____, 20__.
Analysis
Another class of fiduciary bonds is filed in courts of equity. Included in this class are equity receivers, liquidators, trustees, and others appointed by the court to manage or liquidate property. Others in this class are assignees, liquidators, trustees, etc. who are appointed by insolvent debtors to liquidate and distribute property for the benefit of creditors.
Bankruptcy Bonds
KNOW ALL MEN BY THESE PRESENTS: That we, the Principals listed in Schedule “A” attached hereto, and those who may from time to time be added to said schedule, as amendment, and _____, a Corporation duly licensed to do business in the State of _____, as Surety, are held and firmly bound unto the United States of America in the amounts stated in said schedule as to each named principal, in lawful money of the United States, to be paid to the United States, for which payment, well and truly to be made, we bind ourselves and our heirs, executors, administrators, and successors, jointly and severally by these payments.
THE CONDITION OF THIS OBLIGATION IS SUCH THAT:
WHEREAS, the United States Bankruptcy Court for the District of _____ will appoint Trustees in cases commenced under Chapter 7, Title II, United States Code; and
WHEREAS, the said Principals listed in Schedule “A” attached or subsequently added thereto by amendment may hereafter be appointed to serve as such Trustee in one or more of such cases;
NOW, THEREFORE, if the said Principals listed in Schedule “A” attached or subsequently added thereto as Trustee as aforesaid shall obey such orders as the United States Bankruptcy Court or any of the judges of such courts may make in relation to the trust undertaken by said Trustee, and shall faithfully and truly account for all moneys, assets, and effects of each estate created by the commencement of each case in which he has been appointed or will be appointed, and shall in all respects faithfully perform all his official duties as Trustee, then this obligation to be void; otherwise, to remain in full force and effect.
The liability of the Surety hereunder shall not exceed the amount stated in said Schedule “A” for any one case as to each named principal, or the aggregate amount stated in said schedule “A” as to each named principal for all cases on which claims are asserted as to each named principal regardless of the number of years this bond is in effect and regardless of the number of cases involved.
This bond shall remain in full force and effect with respect to all cases pending in this court, in which the said Principals listed in Schedule “A” attached or subsequently added thereto have been appointed, until the Surety has terminated further liability after thirty days written notice filed with the Clerk of the United States Bankruptcy Court of the District of _____.
SIGNED AND SEALED this _____ day of _____, 20__.
Analysis
A third class of fiduciary bonds is required in bankruptcy proceedings of federal courts. Receivers are commonly appointed in bankruptcy to collect and protect assets of an alleged bankrupt usually on petition of creditors. After the creditors have met, a trustee is appointed to take legal title and to hold and distribute the property in accordance with the decrees of the court.
Miscellaneous Fiduciary Classes
Finally, there is a miscellaneous class of fiduciary bonds available to cover receivers, trustees, and conservators of financial institutions and insurance companies. These persons or fiduciaries may be appointed by state or federal courts depending upon the type of proceeding.
Bond Features—Rules
Most fiduciary bond provisions are prescribed by statute. Generally, these bonds are brief instruments that recite the obligations assumed and the capacity of the fiduciary. These bonds also contain the statement that the principal and surety are jointly and severally bound to the state or court for the faithful performance of the principal's duties and the accounting of all property received. The bond must be signed by the principal (fiduciary) and the surety.
The penalty of the bond (similar to an insurance policy's limit of liability) is also established by statute. In some states it is required to be equal to the estimated assets of the estate; in other jurisdictions it must be double that amount.
As the assets of an estate are reduced by distribution or payment of claims, some courts permit the bond penalty to be reduced proportionately. Other jurisdictions do not permit reductions in bond penalties. In these cases, however, surety companies, on receiving proof that assets have been reduced, will usually permit a proportionate reduction in premium.
The bond is a continuous instrument and requires no renewal to be binding. The fiduciary bond does not have a cancellation provision; the bond continues until the fiduciary and the surety are officially discharged by the courts. Many states have statutory provisions that permit sureties to terminate liability for future acts of fiduciaries. Premium charges are generally made annually. The surety is liable from the time the bond is approved until the proceedings are terminated and the surety released.
Since the duties of a fiduciary are generally prescribed by statute and, in some aspects, by the courts, it is difficult to make categorical statements concerning rights of beneficiaries, obligations of fiduciaries, and the scope of judicial bonds. There are, however, several areas where uniformity exists concerning the scope of most bonds.
For example, sureties under judicial bonds are responsible for losses sustained by beneficiaries through embezzlement of the fiduciary. Since embezzlement losses are difficult to detect and not usually discovered until after long periods of time, the surety is generally held liable under its bond for this type of loss until the expiration of the statute of limitation.
Also, a fiduciary is held accountable for assets of estates and is permitted to disburse only those funds authorized by law. This means that a beneficiary is protected under a judicial bond whether a fiduciary's improper disbursements are willful or not.
Joint Control
Sometimes a surety company agrees to write a fiduciary bond only when given joint control over the assets of an estate. Joint control means that the estate monies deposited in a joint bank account of the fiduciary and surety are disbursed by the fiduciary only with the surety's countersignature.
Often fiduciaries mistakenly conclude that a request for joint control is a reflection of honesty. To the contrary, however, the primary purpose of joint control is to protect the beneficiary of an estate against loss caused by neglect of a fiduciary in disbursing property—particularly when the estate is of a reasonable size and the fiduciary is not a corporate trust company or otherwise experienced in the field.