The Importance of a Fiduciary in Estate PlanningJune 5, 2008 — 959 views
A wise choice now could save headaches and money later
The most commonly cited reasons for estate planning are protecting an estate and passing on property to loved ones. Along with these goals, estate planning can prevent family feuds. Frequently overlooked and underemphasized, preventing infighting among heirs can be simple to implement – yet costly if ignored. There are several ways to help prevent these uncomfortable situations, including meeting with your heirs and attorney before and after the estate plan is in place. At these meetings, you should review the decisions made, the reasons behind the decisions, the use of trusts, and the formulas to be used in the event of a "tie" between heirs over an article of tangible personal property. Another important tool in the estate planning arsenal is the choice of fiduciary.
The Fiduciary's Role in Estate Planning
A fiduciary is a person who stands in a position of trust with you (or your estate after your death) and your beneficiaries. There are different types of fiduciaries depending on the context: an executor or executrix is named in a will; a trustee is named by a trust; an agent is appointed by a power of attorney.
Other fiduciaries are not chosen but are instead appointed by a court. For example, a court appoints a guardian for a child or incapacitated person and an administrator for someone who dies without a will. These court-appointed fiduciaries are outside the scope of this article and would typically not be needed if proper planning were in place.
All fiduciaries have a duty to do only what is best for you, your estate and your beneficiaries; however, each type has a different level of power and of oversight by a third party, often a court.
The Role of an Executor
An executor or executrix handles your estate after your death. This person is in charge of probating the will, locating and distributing assets, paying off debts, and filing tax returns. The executor can be compensated for his or her services. Once the estate has been handled, either all beneficiaries of the estate must sign off in an informal manner as to what the executor has done, or a court must accept what has been done in a formal procedure. Through these channels, the executor is held accountable for his or her actions.
The Role of a Trustee
A trustee is selected by a person creating a trust to hold and invest assets, usually for the benefit of another. Through distributions from a trust and periodic accountings of trust income and principal, the income and remainder beneficiaries of a trust are kept informed as to its status. Beneficiaries readily know how well the trust investments are performing and whether any money is being used in an unsuitable or in appropriate way. Armed with this information, the beneficiaries can then petition the court to have the trustee removed. This can be a difficult task because the court hesitates to trump the wishes of the person who established the trust, so there must be evidence of willful mishandling before the court will remove a trustee.
The Role of an Agent
An agent under a durable general power of attorney raises different issues of trust. Unlike your executor, whose authority only takes effect after your death, whose powers are limited, and whose actions are subject to court review, an agent's authority vests immediately, can be very broad, and may be subject to review only if someone challenges in court what the agent has done. This power of attorney authorizes an individual, your agent, to act for you, the principal, in you financial affairs. Because of this, the power of attorney takes effect immediately so that a later determination of incapacity will not have to be made before your agent can act. (This power of attorney is to be distinguished from a springing power of attorney, which takes effect upon a determination of incapacity, but presents a myriad of other problems.) Also, the document generally allows your agent to do whatever you could have done yourself: make account transactions; receive payments from retirement accounts, pensions and Social Security; enter into sales of property; and, sometimes, make gifts – even to him or herself.
An agent may be removed for the mishandling of funds by the court upon a filing of a petition to do so. However, it is often the case that any mishandlings are discovered too late to reverse. Often, this is because the would-be-beneficiaries of the principal do not become aware of their share of the estate until after the person dies. This is to be distinguished from a will or trust situation where the beneficiaries are aware of their share and can serve as informal "watch dogs" as they await distribution of the estate.
Choosing a Fiduciary
Regardless of the various levels of oversight in place, your fiduciary must be someone you trust. Frequently, one spouse appoints the other spouse and trust is not an issue. However, where there is no spouse, the named fiduciary may be a sibling, a child, a corporation, an attorney, a friend, or some other third party.
Depending on the circumstances, the choice itself could cause conflict among beneficiaries of the estate if they do not understand the choice. For example, if a parent names the black sheep of the family executor of his or her estate, the other children might be hurt, angry and confused. These negative feelings may then disrupt the estate plan into which the parent invested a lot of time, energy and money. Another source of headaches comes from naming multiple children to serve jointly as fiduciary, especially an even number of them. All of them must agree on every decision and must sign each check used by the estate to pay bills or make a distribution to a beneficiary. Because of this, any logistical issues or disagreements among them may hold up the process. Sometimes, these disputes end up in court, resulting in additional costs and delays for the estate.
When you consult with an attorney to devise an estate plan, no matter how simple or complex, you are creating documents to serve as a plan or blueprint for who gets what. A well-drawn plan still needs an appropriate fiduciary to ensure proper implementation. Trust is the primary factor to consider, but other factors include:
- The ability to handle financial affairs (it may not be wise to appoint someone as trustee who can't balance his own checkbook);
- Availability (it would be a shame if when your agent is needed she's off on yet another year-long cruise); and
- Accessibility (for a Pennsylvania resident whose will is probated in Pennsylvania, an executor who lives in California may pose a significant hurdle in the administration of the estate).
For those without a trusted individual to appoint, other options are available. An attorney, bank, trust company or a trusted adviser or other financial institution may be the most appropriate selection.
Your choice of fiduciary should be as well thought out as the rest of your estate plan. It is not to be taken lightly.
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