A fiduciary is a person who acts for another person in that other person’s interest rather than their own. In federal tax law the word is defined by naming the roles it covers and then leaving the list open: the term fiduciary means a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person (26 U.S.C. 7701(a)(6)).
The Definition Carries a Scope Phrase Worth Reading
That definition sits inside a subsection with a condition on the front of it. The definitions in it apply when used in that title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof (26 U.S.C. 7701(a)). So it is the default meaning across the Internal Revenue Code, not an absolute one, and a specific provision that says something different for its own purposes wins inside that provision.
The final clause of the definition is the operative one in practice. Six named roles are listed, and then the definition reaches any person acting in any fiduciary capacity for any person (26 U.S.C. 7701(a)(6)), which is a functional test rather than a title.
Giving Notice Moves the Powers, Until Notice Moves Them Back
Being a fiduciary in fact and being one in the IRS’s records are different states, and one statute connects them.
Upon notice to the Secretary that any person is acting for another person in a fiduciary capacity, that fiduciary shall assume the powers, rights, duties, and privileges of such other person in respect of a tax imposed by that title, except as otherwise specifically provided and except that the tax shall be collected from the estate of such other person, until notice is given that the fiduciary capacity has terminated (26 U.S.C. 6903(a)). Notice under that section is given in accordance with regulations prescribed by the Secretary (26 U.S.C. 6903(b)).
Four things in that sentence tend to get lost. The transfer is of powers and rights as well as duties. It is limited by anything specifically provided elsewhere. The tax itself is still collected from the estate of the person represented rather than from the fiduciary. And it runs until notice of termination is given, so it does not lapse on its own when the role ends.
The IRS form for both ends of it is Form 56, Notice Concerning Fiduciary Relationship, which may be used to provide notification of the creation or termination of a fiduciary relationship under section 6903, and to give notice of qualification under section 6036 (IRS, About Form 56).
Paying Other Creditors First Can Cost the Fiduciary Personally
This is the rule that turns the role into an exposure, and it has a narrow exception written into it.
A representative of a person or an estate, except a trustee acting under title 11, who pays any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government (31 U.S.C. 3713(b)). The liability is personal, and it is measured by the payment made rather than by the whole of the unpaid claim.
The priority it enforces sits in the subsection above. A claim of the United States Government is paid first when a person indebted to the Government is insolvent and the debtor without enough property to pay all debts makes a voluntary assignment of property, or property of the debtor, if absent, is attached, or an act of bankruptcy is committed; or when the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor (31 U.S.C. 3713(a)(1)). That subsection does not apply to a case under title 11 (31 U.S.C. 3713(a)(2)).
The Fiduciary Is the One Who Files
For an estate or trust, the return duty is written onto the fiduciary by name. The fiduciary, or one of the joint fiduciaries, must file Form 1041 for a domestic estate that has gross income for the tax year of $600 or more, or a beneficiary who is a nonresident alien, and a return holding a qualified investment in a QOF at any time during the year is filed with Form 8997 attached (IRS, Instructions for Form 1041).
The trust test is written differently and is easy to read across from the estate one by mistake. The fiduciary, or one of the joint fiduciaries, must file Form 1041 for a domestic trust taxable under section 641 that has any taxable income for the tax year, or gross income of $600 or more regardless of taxable income, or a beneficiary who is a nonresident alien, with the same Form 8997 attachment where a qualified investment in a QOF was held at any time during the year (IRS, Instructions for Form 1041). A trust with any taxable income files whatever its gross income was, which is a trigger the estate rule does not carry.
In a Retirement Plan, Fiduciary Is a Function
The employee benefit plan definition is the one most often misread as a job title, and its opening words and its scope phrase both do work.
Except as otherwise provided in subparagraph (B), a person is a fiduciary with respect to a plan to the extent he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, or he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or he has any discretionary authority or discretionary responsibility in the administration of such plan (29 U.S.C. 1002(21)(A)).
Read the phrase to the extent literally. It makes the status partial and activity based, so the same person can be a fiduciary for one act and not for another. Note also the asymmetry inside the first limb: discretionary authority is required for plan management, while any authority or control at all is enough where the assets are concerned.
The Standard a Plan Fiduciary Is Held To
Subject to sections 1103(c) and (d), 1342, and 1344 of that title, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan; with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and in accordance with the documents and instruments governing the plan insofar as those documents and instruments are consistent with the provisions of that subchapter and subchapter III (29 U.S.C. 1104(a)(1)).
Four duties, joined by and rather than or, so they hold at once. Each of the last three carries its own qualifier: prudence is measured against circumstances then prevailing and a like enterprise, diversification yields where it is clearly prudent not to diversify, and the plan documents govern only insofar as they are consistent with the statute. What makes a plan qualified in the first place is a separate question, set out in qualified retirement plans.
The Word Also Names a Fund Type
In state and local government accounting the same root labels a reporting category rather than a person. Money a government holds for the benefit of somebody other than itself is reported in fiduciary funds, and the test that decides what belongs there is about control of the assets rather than about who owes a duty to whom.
Common Questions
A guardian, trustee, executor, administrator, receiver or conservator, and beyond those six, any person acting in any fiduciary capacity for any person (26 U.S.C. 7701(a)(6)). The open final clause is why the answer turns on what someone is doing rather than on what the appointment is called.
The statute works off notice, and Form 56 is the instrument. Filing it notifies the IRS of the creation or termination of a fiduciary relationship under section 6903 (IRS, About Form 56), and until termination notice is given the assumed powers and duties continue (26 U.S.C. 6903(a)).
Yes, in the specific situation the statute describes. A representative who pays part of a debt of the person or estate before paying a claim of the Government is liable to the extent of that payment for unpaid claims of the Government, with an exception for a trustee acting under title 11 (31 U.S.C. 3713(b)).
It depends on what the recordkeeper actually does, because the status attaches only to the extent of the discretionary authority, control, or investment advice for compensation that the statute lists (29 U.S.C. 1002(21)(A)). A provider that exercises none of them is outside all three limbs, however central its work is to running the plan.
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