Imagine being entrusted with a loved one’s finances or overseeing a significant estate. It’s an honor, but it’s also a huge responsibility.

A fiduciary bond is a form of insurance that’s often mandated by the court to protect the financial well-being of beneficiaries. It acts as a guarantee that you, the fiduciary, will carry out your duties ethically and in accordance with state law.

And if you don’t, beneficiaries of the estate or trust won’t lose money as a result of your misconduct or negligence.

In this guide, we’ll 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 entrusted with the duty of acting in the best financial interests of another person. This requires the fiduciary placing the beneficiary’s needs before their own.

A fiduciary bond is an insurance designed to protect a beneficiary from breaches of this fiduciary duty. It essentially provides financial protection to all parties involved, and acts as a safeguard should the fiduciary fail to meet their obligations.

In probate court, where a deceased person’s assets are settled, a fiduciary bond is often mandated by a judge to ensure the executor doesn’t mismanage or misappropriate the estate.

Fiduciary bonds may also be called probate bonds, guardianship bonds or executor bonds.

How does a fiduciary bond work?

To better understand how a fiduciary bond works, consider this example.

Imagine a trustee oversees a sizable estate. The trustee is required to manage the assets responsibly by following terms outlined 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 due to the trustee’s misconduct, the fiduciary bond — which is generally set to an amount equal to or higher than the assets inside the trust — would cover the losses. The company that issues the bond could then pursue legal action against the trustee to recover losses.

Claims covered by fiduciary bonds range from intentional acts of misconduct to acts of negligence or incompetence. This way, even if money is mismanaged due to simple human error, beneficiaries are protected.

Another example takes place during the probate process. Let’s say one of your parents died and named you executor of their will. The court might require you to obtain a fiduciary bond equal to the size of the estate before you’re allowed to start divvying up assets to beneficiaries.

If you make an accounting error or unintentionally commingle funds, the beneficiaries are still financially protected.

Who needs a fiduciary bond?

In some cases, a fiduciary bond is mandated by law, such as in some probate court proceedings. Other times, beneficiaries can request a fiduciary bond to provide an extra layer of protection during situations when someone else might be in charge of managing their money.

A court will often require a bond if the chosen fiduciary has a checkered financial past, or there are other concerns about the fiduciary’s ability to manage assets.

Getting approved for a fiduciary bond can take several months. The process for obtaining one is similar to applying for a loan. Bonding companies assess your financial reliability and background before making a decision.

If you’re considered a financial risk, maybe due to a recent loan rejection, securing a fiduciary bond might be difficult. Similarly, a criminal record or past bankruptcy can also make the approval process challenging. In these cases, it might be wiser to decline the role of fiduciary before applying for a bond.

Types of fiduciary bonds

Each type of fiduciary bond serves a distinct purpose. Here are the most common types:

Executor bond
Required in probate cases to guarantee that the executor of an estate carries out their duties — such as distributing assets to beneficiaries — according to state law and the wishes of the deceased.

Guardianship bond
Appointed to people responsible for a minor or an incapacitated person’s well-being and finances.

Conservatorship bond
Similar to a guardianship bond but specifically focused on financial matters.

Trustee bond
Ensures that a trustee properly administers a trust according to its terms. It provides financial protection to the trust’s beneficiaries.

Cost of a fiduciary bond

The cost of a fiduciary bond varies by state. The exact cost depends on the type and amount of assets under the fiduciary’s control, the jurisdiction in which the bond is issued and the company providing 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 would cost $1,000. The fiduciary usually pays the cost of the bond.

It’s important to note that once the court orders a bond, the fiduciary won’t have access to any of the assets in the estate until the bond amount is issued and paid. Fiduciary bonds are often renewed annually, so the longer a person serves as a fiduciary, the more they’ll pay in premiums for the bond.

Bottom line

Fiduciary bonds are often mandated in probate court, serving as yet another hidden cost in an already expensive and lengthy process.

If you’re required to obtain a fiduciary bond, seeking professional advice is a good idea. 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 that you purchase the right amount of coverage.

Use Bankrate’s financial advisor matching tool to find a certified financial planner in your area.