When you do your estate planning, you will need to choose your fiduciaries: trustees, executors, guardians, and agents for powers of attorney. You can select your spouse or other family members, friends or business associates, licensed individuals in the trust and estate administration business (“private professional fiduciaries”), corporate fiduciaries such as banks and trust companies, or some combination of these. Your choices are critical. Your fiduciaries will handle all your financial affairs for your family and beneficiaries when you cannot, due to incapacity or death; this is a great deal of work and legal responsibility.
Who should take over when you are gone?
A fundamental reason to do estate planning is to control who will handle your assets and liabilities for your family and other beneficiaries after you die. The job usually goes to the successor trustee you name in your revocable living trust, and the executor you name in your companion “pour over” will. The trustee’s role usually is more important since the executor only backs up the trustee by handling any assets that were left out of the revocable trust.
Your trustee will have a lot to do, typically for a year or two: inventory and value all of your assets and liabilities; pay or compromise outstanding debts; handle any pending investments, business transactions, or litigation; take care of income and estate tax returns and tax payments; take over all operating businesses and real estate ventures; decide on asset purchases and sales; deal with all your beneficiaries impartially and fairly; and distribute your assets as you provided in your estate planning documents. The trustees of any ongoing trusts you created for your spouse, children, grandchildren, or other beneficiaries have the duty to carry out the terms of the trusts for as long as they last, as well as making investment, tax, and distribution decisions on an ongoing basis. These duties also apply to trusts you create for beneficiaries while you are living.
What are the skills of the ideal trustees and executors?
- Maturity, sound judgment, and familiarity with family dynamics, investments, valuation, tax, trusts and estates.
- Integrity, independence, and freedom from conflicts of interest with your finances or family.
- The ability to follow strict legal rules governing fiduciaries.
- The time to devote to handling your estate and trusts.
- Familiarity with your financial affairs, family and other beneficiaries.
- The ability to win the trust and confidence of your family and other beneficiaries.
- Experience working with necessary advisors: attorneys, CPAs, appraisers, and investment counsel.
- Experience with any special or complex assets you may own, such as operating businesses, real estate investments or developments, oil and gas interests, restricted securities, stock options, executive compensation, professional practices, fine art, yachts and aircraft.
Since few individuals possess all these skills, if you name an individual as your trustee and executor, he or she must be comfortable hiring and working with experts who can fill in the individual’s missing skills.
An alternative is to name a professional co-trustee and co-executor. For example, while a family member might know your family and beneficiaries, he or she may lack the time and other required skills. A professional trustee, such as a bank, trust company, or private professional fiduciary, could be named as a co-trustee to fill in the missing skills. The best banks and trust companies have in-house expertise covering most areas of trust and estate administration. Some will serve as “agent” for individual trustees, providing services without acting as a co-trustee.
Sometimes it can make sense to have more than one individual co-trustee serving with a professional co-trustee. For example, one individual could handle distributions to beneficiaries, another could make business or investment decisions, and the professional trustee could be in charge of tax filings, holding and trading securities, and providing trust statements and accountings.
Having a bank, trust company, or private professional fiduciary serve as a co-trustee can be a particularly good idea if an individual co-trustee has:
- a built-in conflict of interest (like being a beneficiary of the trust or an executive of an operating business held in the trust);
- characteristics that would cause tax problems, such as California residency if the trust is designed to avoid California income tax and therefore needs a non-California trustee, or certain powers or trust interests that could cause federal estate or income tax problems; or
- sensitivity to legal exposure from trust beneficiaries who might claim that the individual co-trustee was liable for a breach of fiduciary duties when handling trust investments, tax decisions, distributions to beneficiaries, or other trust administration steps.
It can also make sense to choose a bank, trust company, or private professional fiduciary to act alone. You may not have a family member or other individual with enough time or skill to act as a fiduciary. Some individuals may have conflicts of interest, or may fear exposure to headaches (or worse) if put in the middle of a difficult family or financial situation. For example, it may be unwise to name one adult child as trustee with power to decide whether and when a brother or sister gets any trust distributions. In the case of a family member who is too young to act as fiduciary, a professional could start out, with the family member stepping in as co-trustee or sole trustee upon reaching an appropriate age. In the opposite case, a professional could take over for a family member when that family member dies or becomes too old, busy, or weary of fiduciary responsibilities to continue.
While a professional fiduciary will charge for services, it may be worth the cost to avoid problems and assure on-going continuity of trust administration. The cost may not be much greater than the cost incurred by an individual fiduciary who has to hire a group of experts, each of whom will charge the trust or estate for services provided. Also, an individual fiduciary is entitled to compensation for his or her services. Although a family member or friend might consider declining compensation, the better approach may be to pay compensation in recognition of the seriousness of the individual’s fiduciary duties.
Who should take over if you become incapacitated?
If you become incapacitated due to accident, illness, or infirmities of old age, a fiduciary can step in to handle your assets and liabilities. This typically will be the successor trustee of your revocable trust (for your assets in the trust) and the agent under your durable power of attorney for property (for your assets not in the trust). Ideally, these will be the same person or professional so that there is unified management of your assets. As to health care and medical decisions, they can be made by the agent you name in your advance health care directive.
In the case of the successor trustee of your revocable trust and the agent under your durable power of attorney for property, the necessary skills and available choices are identical to those previously described for trustees and executors. One important difference is that the fiduciaries you name will owe their primary duty to you, since you will be living, but incapacitated.
In the case of your agent under your advance health care directive, it would be rare to find a professional fiduciary willing or able to take on this intensely personal job. The health care and medical decisions to be made by the agent are usually left to a family member or close friend, who you are confident will understand your wishes stated in your directive and be willing to carry them out. This person must have the temperament to handle critical health care decisions, including potential end of life “pull the plug” issues. He or she might have to put aside personal values or religious beliefs to carry out your stated wishes.
Who should be guardians for your minor children?
One of the most difficult decisions can be selecting guardians to care for your minor children, even though it would be unusual for both parents to die while their children are still minors. There are two types of guardians: one responsible for the child’s daily care (guardian of the person) and one responsible for the child’s assets (guardian of the estate). These can be different people. Individuals, usually relatives of friends, are invariably named as guardians of the person.
Recognizing that no one can truly replace a parent, questions to consider include:
- Will the guardian raise your children according to your values?
- Will the guardian provide a suitable home environment in a locale you approve?
- Will the guardian be able to spend sufficient time at home caring for your children?
- How much of a burden will this be for your guardian, assuming that you have set aside enough funds in trust to remove any personal financial cost to your guardian?
- Does your guardian have children and how will your children fit in with them?
- In the case of very young children, is the guardian young and able enough to serve until the children become adults?
- In the case of a teen tied to friends, school, and activities, should the guardian be a local resident rather than a relative living at a distance from the teen’s home?
- If you name a couple as co-guardians, who will serve if one of them ceases to act in the future; for example, if the couple gets divorced or one of them dies or becomes incapacitated?
- If your guardian becomes unable to serve, who should be the successor?
In the final analysis, choosing a fiduciary can be an example of “the perfect being the enemy of the good.” Sometimes you can become so worried about who will be the perfect fiduciary, particularly in the case of a guardian, that it can seem easier to put off completing your estate plan than making a decision. However, a choice that seems generally reasonable is better than leaving the choice up to a court in the future, or leaving in place a fiduciary you no longer want. (It is important, too, that you have spoken to those you have named to be sure that they are willing to serve when the time comes.) And, finally, you can always amend your documents to make a new choice if a better one arises later.
This publication is for informational purposes only and is not intended to provide legal or tax advice, or to create an attorney-client relationship.
Pursuant to IRS Circular 230, unless expressly stated to the contrary, any tax advice is not intended and cannot be used to (i) avoid penalties under the Internal Revenue Code or (ii) promote, market or recommend any transaction or matter to another party.