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Fiduciary Roles

June 30, 2016

Choosing an Executor or Executrix

One of the most important decisions you will make is picking the person (or the persons or institution) to be in charge of your assets after you are gone. That means the executor of your will, the trustee of any trusts that you set up, a guardian for your minor children, an agent  for your financial power of attorney, and an agent under your health care power of attorney/living will.

In most instances, you can choose more than one person to fulfill these positions. This is a way to ensure that at least one person has legal or financial expertise and one is close to the family. If you choose this course, be sure to pick people or entities that can work together. You must also choose a successor in case your first choice dies or is unable to serve.

Executor

The executor will be the person or institution responsible for administering your estate after your death. The most important thing is to pick some one who is financial responsible, stable, and trustworthy.

The executor is responsible for:

  • Collecting the assets of the estate
  • Protecting the estate property (by investing wisely or liquidating estate assets)
  • Preparing an inventory of the probate assets
  • Paying valid claims against the estate
  • Preparing and filing inheritance and estate tax returns and fiduciary income tax returns
  • Paying the taxes associated with those tax returns
  • Representing the estate in claims against others
  • Distributing the estate property to the beneficiaries (including tangible personal properties)

The executor does not have to shoulder the entire burden of performing these tasks and normally engages our law firm to take care of most of these functions.

There is no consensus, even among lawyers, about who makes the best executor; it all depends upon your individual circumstances.

One approach is to appoint someone with no potential conflict of interest – that is, someone who does not stand to gain from the will. This could be a sole executor or co-executor. Under this approach, some people avoid naming family members or business partners. This helps to avoid will contests from disgruntled relatives who might accuse the executor of cheating. If you have several beneficiaries who do not get along, you may want an outside executor (or co-executor) who is independent of all factions.

The independent executor could be a non-family member or a bank or trust company.

Some people simply choose their spouse or a mature child or children to be the executor. This person will naturally be interested in making sure the probate process goes as quickly and smoothly as possible. Other individuals who own or run a business choose a business partner or officer of the business to be an executor or co-executor.

Executors (both individual and corporate) can receive compensation for their services. The compensation can be calculated in accordance with a fee schedule based upon the assets of the estate or on an hourly basis for work performed. The duration of the executor’s duties lasts normally around one year to 18 months (longer for larger or more complicated estates).

Trustee

If your will leaves assets to a trust for one or more beneficiaries, the executor will transfer those assets to the trustee for distribution to the beneficiaries and for continued management.

Depending upon the duration of the trust that you established, the trustee’s duties can continue for a few years or many generations of your family.

The trustee is responsible for:

  • Investing the trust assets
  • Making distributions to the trust beneficiaries (both mandatory distributions and discretionary distributions)
  • Preparing and filing fiduciary income tax returns
  • Paying the income taxes
  • Keeping trust records

When considering whether to make a distribution from the trust, the trustee consults with the beneficiaries about their individual needs, the needs of future beneficiaries, and what other assets may be available to the beneficiaries for their support.

The biggest decision to make in designating a trustee is whether to use a family member or a professional. Obviously, it is preferable to choose a trustee with whom the beneficiaries feel comfortable.

Family members as trustees: pros and cons

Many people choose family members to serve as trustees. They do not charge a fee and they generally have a personal stake in the trust’s success. If the family member is competent to handle the financial matters involved, has the time and interest to do so, and if you are not afraid of family conflicts id one relative is named trustee, using a family member can be a good move for a small to medium sized trust. If you make a relative a trustee, be sure to consider who the successor will be in the event of death, incapacity, divorce, or other family strife.

Many individuals name co-trustees. For example, a spouse will typically be a co-trustee so that when one spouse dies, the other takes over with a successor co-trustee (individual or corporate).

Since no individual lives forever, a bank or trust company may be considered as a trustee, co-trustee, or successor trustee.

Most people reject the appointment of a corporate trustee (e.g. a bank or trust company) since they charge a fee for their service. While this is true, please keep in mind that utilizing  only individual trustees (including family members) does not mean that the trust is fee-less. The individual trustee must engage someone to help invest the trust assets, to keep trust records, and to prepare income tax returns. Each of these engagements will require the payment of a fee.

As a result, individuals may be able to administer the trust for a fee that is less than what a corporate trustee would charge, but the individual will not be fee-less.

Often, individuals want to name the beneficiary of the trust as the trustee (if the beneficiary is an adult). Care should be taken in naming a beneficiary as the trustee – especially as the sole trustee – since distributions from the trust are often limited for tax reasons.

Finally, we encourage individuals to name their children as a co-trustee (not the sole trustee) of a trust for the child’s benefit when the child attains 18, 21, 25, etc. years of age. This gives the child a good education on the investments of assets, the filing of tax returns, and the payment of taxes. If the child is a co-trustee with an individual or corporate trustee, the trustees will meet regularly to discuss the investment strategy for the trust and review current investment holdings.

Guardian for your minor children

If you die and your spouse survives you, he or she will naturally have custody of your minor children, so you might think there is no need for a guardian of the person for them. Even if you are divorced, it is almost impossible for the custodial parent to deny the noncustodial parent custody of their children if the custodial parent should die. (There are rare exceptions, such as if the surviving parent if in jail or has been found incompetent by a court).

But what if you both should die, say in a car accident? Your will should provide for that real, if remote, possibility by nominating one or more persons to be the guardians of the person of your minor children and to take physical custody of them.

How do you select a guardian (and successor guardian)? You need to ask (and answer) questions to arrive at the correct answer. Who would provide the best care for your children if you die? Answer this question with a view toward religious, socioeconomic, and geographical considerations. For example, if a child is in their mid-teens and has a good relationship with friends in the current area, it may be disastrous to appoint a guardian who lives out of state. The loss of the parents, coupled with being separated from friends could be very damaging.

A will can nominate a guardian of the person. The Probate or Orphans’ Court judge does not have to accept your choice – although unless someone challenges that choice as not being in the child’s best interest, the court will almost always go along.

Be sure to consult with the person you name to be sure he or she wants the job and name an alternative guardian in case your first choice should have a change of heart or die before the child is grown.

Agent for your financial power of attorney

You should consider signing durable financial power of attorney as part of your estate plan. Picture a timeline: today, you are alive and fully capable of managing your affairs. At the other end of the timeline is the date of your death. Somewhere in between, either due to accident or illness, you may become unable to mange your financial affairs for a short or extended period of time. Who manages your finances if you are unable?

Without a power of attorney, someone would have to (literally) take you to court and have you declared to be incapacitated. A guardian of your estate (and person) would be appointed and the guardian of the estate would have to show the court, on an annual basis, the disbursements of your funds.

If you are like most people, you want to keep the court out of your life as much as possible. In most cases, a power of attorney eliminates the need for a court appointed guardian to manage your affairs. The agent under the power of attorney is given broad powers over your property and can generally do everything with your assets that you could have done when you had the capacity to do so – except, generally, the power to take all of your money and gift it to him or herself.

The agent can be one or more individuals or a corporate fiduciary. You should also consider whether multiple agents should be required to act jointly or whether they can act individually. Finally, you should appoint a primary agent and then a successor. Similar to the executor and the trustee appointments, you should select someone who is financially responsible, stable, and trustworthy.

Agent under your health care power of attorney/living will

The health care power of attorney/living will allows you to set forth your personal preferences with regard to the use or application of certain life sustaining procedures which serve to prolong your life artificially if you are in a terminal condition or permanent state of unconsciousness. It also allows you to choose an agent to make these (and other) health care related decisions for you if you are incapaciated.

As with all other fiduciary appointments, a primary and successor should be considered and appointed. The appointment of multiple agents who serve together is not forbidden, but consideration needs to be given to the possibility of disagreement. For example, if you appoint two of your children as the agents and they disagree, who will the doctor or health care provider take direction from? You should select someone as your agent whom you trust to be able to receive and process medical information from your health care providers and make decisions based upon your directions (and not their personal preferences).

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