A fiduciary, by definition, is a trustee. It’s a person that’s been given power over another party’s interests and assets. Thus, the purpose of a fiduciary bond (also known as a probate bond) is to protect those who have an interest in what the fiduciary has been given authority to oversee. In simpler English: a fiduciary bond guarantees that a person who’s been appointed to act on behalf of another does so honestly and faithfully.
Trustees are often court ordered to take out a fiduciary bond. Why? Because they might’ve been appointed to take care of the estate, plan assets, or affairs of someone that’s unfit to do so.
The term “unfit” could mean someone who is disabled, deceased, a minor, or incompetent.
In which case, the court-ordered bond offers a financial form of insurance that says the trustee will not take advantage of or neglect the situation.
There are three parties in most fiduciary bonds:
- The obligee (or the party requesting the bond, i.e. the court)
- The principal (the trustee)
- The surety bond provider (the company acting as the guarantor)
What is the purpose of a fiduciary bond?
If the trustee (the principal) acts unfaithfully on behalf of another party, then the fiduciary bond covers damages or financial losses incurred. Basically, if the trustee does something overtly risky or criminal that may be breaking the law (like blatantly stealing the plan assets), the money from the bond can act as a safeguard for the person(s) the trustee is stepping in for.
Additionally, these bonds can also be used when providing financial advice, particularly as it pertains to taxes or debts. Thus, they can also be called:
- Guardianship bond
- Administrator bond
- Executor bond
- Trustee bond
- Conservatorship bond
- Probate bond
How much does a fiduciary bond cost?
Typically, a fiduciary bond is based on the total estate (or asset) value that the fiduciary is responsible for. However, to acquire a fiduciary bond, the trustee has to pay a premium.
The premium: Typically, the premium for a fiduciary bond is between 1-3% of the bond amount. In which case, if the asset value is $200,000, then the bond’s premium would be somewhere between $2000-$6000.
A sliding scale: Typically, as fiduciary bonds increase, there’s a sliding scale that reduces the total amount of the premium. The larger the size of the bond, the less the percentage. It’s not unheard of to see a premium come in below 1% of the total amount.1
Again, state laws tend to affect the overall price of a bond (and sometimes, there are certain minimums that must be met).
How does someone get a fiduciary bond?
When applying for a fiduciary bond, the obligee must first provide court documents and the reason in which the bond is being issued. Depending on the surety bond provider and the risk inherent to the request, the obligee will (typically) have to:
- Provide an overview of their finances
- Run a credit report or provide a personal financial statement
- Go through a background check
The bottom line: The surety provider wants to know who they’re dealing with. They take the individuals history and the risk associated with the request, then evaluate whether or not they’re trustworthy enough for a fiduciary bond.
Does a trustee get their fiduciary bond money back?
In short, it depends.
Theoretically, a fiduciary that puts up the bond themselves should always receive their money back, granted they acted in good faith and didn’t cause any damage to the assets.
Yet, when it comes to surety company providers, if the trustee doesn’t have the money to “float” the bond, then the premium goes to them. A surety bond provider puts up the money, thus the trustee is responsible for the premium.
Are fiduciary bonds renewed?
Yes. They’re (typically) renewed every year or every few years, depending on the situation and state. If an obligee’s credit score or financial situation changes, then the surety estate bond provider will usually adjust the premium. In this way, a fiduciary bond acts like an insurance policy—one that’s active until the fiduciary is no longer responsible for the assets or estate. If you are in need of these services, our fiduciary liability insurance is a great place to start.
Is a fiduciary bond also an ERISA bond?
In a way, yes. In other ways, no.
ERISA, or The Employee Retirement Income Security Act of 1974, introduced new rules for fiduciaries (companies) that were overseeing employee retirement plans. The law was instituted to protect an employee in a situation where those that were acting on their behalf (as it pertains to their retirement fund), did something criminal, negligent, or inappropriate with their money.
In which case, an ERISA bond does cover fiduciary error, rendering it a type of fiduciary bond. In reality, an ERISA bond is a much larger umbrella that accounts for conflict of interest, administrative error, and specifically covers 401k and pensions plans.
Sometimes, however, the two are used interchangeably.
Fiduciary bonds & insurance
A fiduciary bond acts like insurance. If the trustee acts inappropriately or criminally, then those who own the estate or assets have a safeguard.
At Thimble, we believe businesses need safeguards, too. Our small business insurance—which includes general liability insurance and professional liability insurance—can help protect you from third-party claims of:
- Bodily injury
- Personal injury
- Advertising injury
- Property damage
- Professional negligence
With our revolutionary pay-as-you-work structure, we provide insurance that works when you do. Our policies go by the hour, day, or month, and you can tailor them to exactly when you’re on the clock. In doing so, we’re able to bring a whole new meaning of affordability to insurance.
Aside from creating insurance for the 21st century, we’re also here to help you understand the nuances and mechanics of the industry. Should you want to read about other types of bonds or insurance policies, peruse our archive of information to find complex terms—like fiduciary bonds—made simple.
Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.