Wednesday, November 16, 2005

A Bonded Fiduciary - The Role of a Surety Bond in an Estate Administration

Category: Probate and Estate Administration

What does it mean for a fiduciary of an estate (Executor, Administrator or Personal Representative) to be "bonded"? A surety bond is a requirement that the Surrogate may set before Letters Testamentary or Letters of Authorization may be issued.

Wikipedia defines a surety bond as: "A surety bond is a contract between at least three parties: (i) the principal, (ii) the obligee, and (iii) the surety. Through this agreement, the surety agrees to make the obligee whole (usually by payment of money) if the principal defaults in its performance of its promise to the obligee. The contract is formed so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal."

In the case of the administration of an estate, (i) the Principal is the fiduciary, (ii) the Obligee(s) are the beneficiary(ies) of the Estate, (iii) and the Surety is the insurance company issuing the bond. The bond acts as a source of funds to compensate the beneficiaries if the fiduciary mis-manages the estate.

A surety bond will be required in those situations where (i) the Will does not have language wherein the testator waives the need for the executor to get a bond, (ii) there is no Will (an estate administration), (iii) where there is a will, but the named executors cannot serve (i.e.: the executor has died, and no successor is named under the will, and (iv) as otherwise required by the Surrogate.

The amount of the surety bond will depend on the total probate assets of the estate (those assets in the decedent's own name at the time of death). The Surrogate sets the bond amount, and evidence of the surety bond must be obtained before the Letters Testamentary or Letters or Authorization are issued, which allow the fiduciary to act on behalf of an estate.

The surety bonds generally are for a one year period, and must be kept in force until the estate is distributed.