What should you consider when selecting such fiduciaries as part of your estate plan?

One of the most important decisions in estate planning is often given short shrift: Who should be named as the executor (or in some states called a personal representative) of your will and as trustee of any trusts you establish to carry out your estate plan? The consequences of your choice can be substantial, both in terms of the burden placed on those who have this “honor” and the ultimate success of the management or administration of your assets. Careful deliberation is critical as whomever you select should be prepared for the challenges and time commitment associated with the job.

Consider what acting as such a fiduciary may entail.

An executor is responsible for carrying out the terms of a will, which includes multiple tasks: presenting the will for probate with the court; collecting, protecting and valuing the estate’s assets; settling debts; paying estate expenses; overseeing the preparation of income and estate tax returns and paying the associated taxes; making decisions on how to fund bequests; and ultimately distributing the assets to beneficiaries named in the will. There is considerable discretion in carrying out these duties, so the executor needs to understand the intent of the testator and the nature of the estate’s assets and liabilities. In addition, it is important to be at least familiar with investment principles, probate and tax law, and asset valuation concepts and their impact on administration decisions.

A trustee administers a trust for its beneficiaries, a role that often carries considerable responsibility and typically lasts much longer than that of an executor. Trustees are subject to stringent duties as set forth by state legislatures, courts and the terms of the trust instrument. They need to be able to handle complex administration, discretionary distribution decisions, investment matters and federal, state and local tax issues, all while looking out for and balancing the interests of both the current and remainder beneficiaries. Trustees may need to manage a trust actively for years, even decades.

These jobs are often highly technical and time consuming, and many people simply do not understand what they are getting themselves into when they become a fiduciary. In such a role, they are legally responsible for doing the job properly. If they do not perform appropriately, they could be subject to personal liability. Of course, advisors such as lawyers and accountants may be retained to assist with these myriad tasks, but their hiring and supervision adds to the typical fiduciary “to-do” list.

Avoiding the Family Trap

Despite the complex nature of the job, it is often family and friends who are called upon to serve as fiduciaries. This choice may be the result of sentimentality or viewed as a tribute— like being the best man or maid of honor at a wedding. Or, it is viewed as assuring a personal touch, based on the notion that they will understand your wishes and prove reliable in seeking to achieve them. However, good intentions do not necessarily translate into good results.

Here are a few situations we have seen over the years:

  • Distorted family relationships. A sister serving as trustee of a discretionary trust for her brother was required to obtain his financial data—information he preferred to keep private and she was not eager to know, either—to determine whether to make distributions to him. She became more like his banker or parent than a sibling. In another instance, two sisters served as trustees for a third “spendthrift” sibling, who came to resent them for always saying no to her monetary requests. In cases like these, family dynamics may change for the worse.
  • Fumbling hard decisions. The flipside of the personal touch is often a trustee’s skittishness over disappointing or angering close friends or relations. Avoidance is not a fiduciary characteristic, nor is simply giving in. The sister trustees above could have dodged conflict by rubber-stamping the beneficiary’s distribution requests, but that could mean they were not fulfilling their fiduciary responsibilities to the remainder beneficiaries of the trust.
  • Exhaustion. Administrative tasks connected with a trust or estate can become overwhelming. If you have investment accounts at multiple financial institutions and real estate in a couple states, imagine your liberal-arts-major nephew as executor sorting through all the paperwork, aggregating your records and supervising your attorney, accountant, appraisers and others. The situation may be worse if you choose an otherwise qualified niece who works long hours at an investment firm and has no time for a “second job.”
  • Turnover. It sometimes takes two to three years to settle an estate—and depending on the terms, trusts can last much longer. So while the fiduciary may start out with good intentions to fulfill the responsibilities of the role, other demands could intercede such as family obligations, his or her primary job, or life changes such as a move to another part of the country, making it impractical to continue.

Benefits of ‘Going Corporate’

The issues above tend to highlight the benefits of using a bank or trust company for the comprehensive duties of a fiduciary. Corporate fiduciaries are appealing for a variety of reasons. They typically have considerable knowledge and experience across disciplines—whether administration, planning, taxes or wealth management—that are part of overseeing a trust or estate. Not only can you get expertise tied to these individual elements by appointing a corporate fiduciary, but an understanding of how they fit together—often providing for a smoother process.

Moreover, corporate trustees can help manage some of the pitfalls mentioned above. With an independent party participating in discretionary distribution decisions, family relationships are less likely to be disrupted. Without close personal ties to muddy the waters, the corporate fiduciary can have those discussions with the beneficiary that would be difficult for a friend or family member; and it can bring to bear the breadth of its experience in handling delicate situations without angst. As for the issues of fatigue and continuity, corporate fiduciaries are generally set up to handle complex situations on an ongoing, long-term basis.

It is commonly believed that having a lay person serve as one’s fiduciary will save money because using a corporate fiduciary is expensive. But once a team of experts is hired to take on various aspects of administration, the cost differential may seem slight relative to the benefits received.

Joining Forces: An Effective Solution

Rather than settling for an either/or choice, one effective solution may be to combine both: an individual serving as co-trustee or co-executor with an institution. The individual can provide valuable perspective on the family situation, while the corporate fiduciary can do the “heavy lifting,” bringing to the table multiple layers of expertise and neutrality.

Additionally, the objectivity and psychological distance of professional fiduciaries can make it easier for them to be effective without jeopardizing a family bond. At the same time, a conscientious corporate fiduciary will generally strive to build close relationships with you and your family so that the advice, investments and other services provided are aligned with your goals and objectives, as well as abiding by the letter and spirit of your estate planning documents.

Understanding the Implications

Whatever your preference, having a competent fiduciary is critical to the success of your estate plan. No matter how clear and comprehensive the documents, how they are implemented is vital. Selection of the wrong person may cause a host of financial, tax and family issues, turning what was a well-designed plan into a poorly executed reality. Using a corporate fiduciary or a combination of corporate and individual fiduciaries can provide the array of expertise, experience, personal attention and oversight needed to accomplish your goals.

What Does a Fiduciary Do?

Executor/Personal Representative:

  • Review and file the will with probate court
  • Notify interested parties of death
  • Determine estate’s initial cash requirements
  • Collect, safeguard and value estate assets
  • Create investment plan tied to specific estate needs
  • Supervise portfolio managers, accountant, attorney
  • Develop tax plan to minimize income and estate taxes, make tax payments
  • Maintain detailed records
  • Assure proper distribution, prepare final accounting
  • Estate process typically takes 1-3 years

Trustee:

  • Analyze/understand the terms of the trust agreement
  • Determine law that governs the administration of the trust and the various statutory distribution and reporting requirements that may apply
  • Assess rights/requirements of current and remainder beneficiaries
  • Determine investment strategy including asset allocation, with the interests of both the current and remainder beneficiaries in mind
  • Supervise portfolio managers, attorney, accountant
  • Monitor the investments, make adjustments as necessary
  • Make distribution decisions in light of trust terms and beneficiary needs, while balancing the interests of the current and remainder beneficiaries
  • Prepare and file trust tax returns
  • Make payments, provide beneficiaries with appropriate tax information
  • Maintain detailed records
  • Wrap up trust at expiration
  • Trustee role can last for many years