There are two different kinds of people who serve as estate administrators. First, if you have done a will, your states administrator will be called a ?personal representative?. A personal representative is the same as what we have traditionally come to know as the ?executor? of your estate, and your personal representative?s job is to administrate your will, settle your state, finalize your taxes and take care of your beneficiaries. If you have created a trust, then your estate?s administrator will be a ?trustee?. The trustee does many of the same duties that a personal representative does in the settlement of your estate, but the difference is that your trustee does not have to work with the courts in order to accomplish that goal.
Duties of your estate?s administrator
Your estate administrator is what lawyers like to call a ?fiduciary?. A fiduciary is someone who has a very high duty of responsibility to someone else. It is the highest standard under the law. Fiduciaries are personally liable for any negligence they may commit during the course of their job, and the common law has developed high standards ?duties? of loyalty, care, investment, accounting, and investment.
Your estate?s fiduciary (trustee or personal representative) is a very busy person. After you pass away they need to secure all of the assets to make sure that they are safe, pay all the final bills, start probate if necessary, inventory and value the assets, communicate with beneficiaries, sell what needs to be sold, pay creditors, manage trusts, resolves conflict, manage businesses, defend against lawsuits, bring necessary license, follow instructions exactly, file tax returns, distribute assets to beneficiaries, and close the estate in a way that satisfies the beneficiaries.
In our modern world, trustees and executors have a great number of challenges. First, in the last 15 years the courts are developed an entire standard investment that they call the ?Prudent Investor? standard. This requires trustees and personal representatives to invest in a highly responsible way, and if they do not invest according to the terms of the prudent investor standard, they are very often personally liable for their negligence. Additionally, there is an increasing amount of litigation against fiduciaries. Trusts and Estates magazine in its May 2001 issue said this:
?In this increasingly litigious society, it has never been more important for fiduciaries to focus on litigation as case law helps to shape our approach to issues.?
In addition to these challenges, trustees and personal representatives have very complex social and family issues that they have to deal with, and they are dealing with wealthier and wealthier estates, so, consequently, there is much more at stake in the settlement of these Estates.
Choosing the ?right? trustee
Understanding that the administrators duties are very strict and very onerous, the good news is that you have more choices of people to serve as administrators of your estate than you ever have before. Options are really at an all-time high. These include?
- family and friends
- point play individuals
- professional professionals including CPAs and attorneys
- mutual fund owned trust banks
- brokerage firm owned trust banks
- insurance owned trust banks
- Bank trust departments
- Independent Private Trust Companies
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The duties of a trustee
The trustee of a trust has a number of very key duties which may help you to understand who the proper trustee would be in your situation. The trustee has a duty to set up the trusts administratively and properly, and devise an investment plan for the assets. Investment plans are very important, as the goals of the trust will dictate what sorts of investments are included in the trust. Is income important? Is growth important? Is diversity of assets important? Is education the goal? How long of will the trust exist? Does the trust exist for multiple generations? These and other issues have a direct impact on how the assets are actually best.
In addition your trustee needs to have a good knowledge of the applicable law associated with trusts in your jurisdiction. Trustees very often need to exercise discretion on distributions, so consequently they need to be very responsible and understand the importance of discretionary distributions. Trustees have a great deal of tax accountability and must file tax returns in a prompt manner pay taxes in a timely manner otherwise the trust may fall prey to IRS collections. In addition to these trustee has very high ethical standards including the duty of loyalty, a duty of confidentiality, a duty to be impartial in making decisions, and a duty to disclose the assets and the expenses and income of the trust. Finally trustees must act in a timely manner to make sure the distributions are made on time, assets are sold in the proper frame the estate is settled in a timely manner
What should you look for in a trustee?
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There are probably more qualities than the list that I?m going to give you, but these, to me, seem to be the most important capabilities you should look for in a trustee:
Availability
The trustee needs to be available to speak with beneficiaries and to disclose information to beneficiaries as they need that information disclosed. They need to be approachable and easily reached by the beneficiaries without a great deal of hassle and bureaucracy.
Team approach
Your trustee is going to need to work with a variety of people, including an estate and trusts attorney, an accountant, financial managers, the Internal Revenue Service, life underwriters, property and casualty insurers, and others. Consequently, your trustee needs to ?play well? with others.
Investment performance
Your trustee needs to have a good and thorough understanding of investments and investing, including modern portfolio theory and the prudent investor will. A fairly high level of sophistication is necessary in order for this to happen.
Accounting procedures and compliance
Your trustee must understand accounting procedures, including how to create balance sheets, debit and credit ledgers and proper trust accounting procedures. New laws in many states put a tremendous burden on trustees to properly account to beneficiaries in a timely and accurate way, and consequently your trustee needs to have a certain level of sophistication in order to do this
Should my ?Brother Bob? be trustee?
What I mean my ?Brother Bob? is anybody who?s going to be a friend or a family member who will serve as your trustee. The wonderful thing about having ?Bob? as your trustee, is that your friend or family member knows your family history, and that old clich? ?blood is thicker than water? is true. They know your heart, they know your intentions, they know your beneficiaries personally, and they care about what you hope to have happen in the settlement of your estate. Additionally, very often friends and family members are the lowest cost trustees because quite often they don?t charge, or they charge less than anyone else. Finally, they are more approachable, and, because they don?t have a committee to report to the day are very often quicker to make decisions.
On the other hand, friends and family members do have certain shortcomings that are important to recognize and consider. Very often the family member is wonderful at running the barbecue at the reunion, but not necessarily competent in managing your trust. Sometimes family members lack the skill and sophistication to be able to properly administrate your estate in the way that it needs to be administered. In very modest and uncomplicated estates, family members naturally seem to be the best trustees and administrators. But even in these estates very often that person you select is your contemporary and, consequently, they could possibly become incapacitated or pass away before they finish their job. As such, alternates are important. ?You need to ask tough questions in considering a family member or friend as Trustee: What kind of investment skills does your friend or family member have? Do they have the level of sophistication that?s necessary to match the level of complexity of your estate? Additionally, and unfortunately, friends and family members who are negligent in their jobs do not have insurance or bonds, so consequently if they lose your state?s money there may be no recourse for beneficiaries to be compensated.
Finally and perhaps the biggest issue in choosing a friend or family member as Trustee, is that very often there is social conflict. Particularly in a situation where you have a complicated family, perhaps there is conflict between siblings, special needs, disabilities, or irresponsible beneficiaries, the trustee?s job may very well be to tell beneficiaries ?no? when they asked for distributions to which they should not be given. Unfortunately your friend or family member has a social relationship with these beneficiaries, and you are putting them in a very uncomfortable position by asking them to be the ?bad guy? in saying no to requests. They still have to show up at Thanksgiving and the holidays as friends and family members, and you can be very well putting them into a very delicate situation.
Should your trustee be a professional?
Very often clients have a trusted relationship with their accountant, their financial advisor or their attorney, and see them as logical fiduciaries for their estate. Like family members, professionals can make good trustees as they have good knowledge of your case. If it was the estate attorney who drafted your estate documents they understand the documents and what your intentions were. If they are your accountant they understand what your tax situation was, and likewise, they are your financial advisor they understand your investments. Keep in mind, however, that some of the same shortfalls of family members and friends fall on the shoulders of your professionals to. Professionals retire, become incapacitated and pass away themselves. Very often just because they are an attorney or an accountant doesn?t mean they have any expertise in this field is specialty, and they may not have the time to devote to settling your state properly.
Corporate trustees
Corporate trustees have been available for a very long time in the form of bank trust departments. In recent times almost every brokerage firm, insurance company and credit union has also created a trust department, primarily in order to keep your assets under management act you pass away. In addition, a really good choice came into existence in the last few decades in the form of private trust companies. Private trust companies are insured and regulated, and yet they?re small enough that they?re not bureaucratic, and very often they have a high level of sophistication in managing trusts and also managing wealth even while you are alive. I very often have clients who churn over the management of their investments to private trust companies, because the private trust company serves as a fiduciary to the client while they are still alive. The client has the opportunity to assess their skills and expertise while they?re still around to make changes, but at the same time, unlike brokerage houses, the trust company has a fiduciary responsibility to invest wisely on behalf of the client which is a standard that should not be taken lightly.
The benefits of having a corporate trustee include the fact that they are very professional and experienced and can do a very good job in managing assets, working with beneficiaries, dealing with your professional team of attorneys accountants and financial managers, while at the same time being very impartial, very skilled, and insured in case negligence does occur. Additionally, corporate trustees are very cost-effective. Very often corporate trustees base their fee on the value of the assets that are under management, and the fee is very often less than 2% of the value of the assets each year, which includes all trust management all investment management all of the tax returns dealing with all of the beneficiaries.
On the other hand, many corporate trustees are very bureaucratic, and beneficiaries may not like dealing with the trust officer that?s located in New York or Los Angeles or Chicago. Corporate trustees don?t know your family, and don?t understand the ?heart? of your estate plan. Additionally banks and financial institutions have been emerging at a breakneck pace over the last dozen or so years, and consequently the corporate trustee you choose, may not be in existence or may have been merged into another bank by the time you die. Corporate trustees don?t tend to like to manage real estate and will very often sell any real estate in your state as soon as they have the opportunity to and they may be slow to respond or make decisions regarding distributions to beneficiaries. I?ve found that the small private corporate trustees do a much better job of this. They develop close working relationships with the beneficiaries, and when you call them you get an actual person on the phone. In my own plan I have selected a private corporate trustee to manage the trusts for my children based on my working relationship with several private corporate trustees.
Summary
Selecting a trustee/personal representative is one of the most important decisions in your estate planning, and one that should not be taken lightly. Spend time talking with your estate planning attorney about what choices are right for you, and realize that choosing a trustee is not bestowing? honor? on someone. You are placing the mantle of responsibility and a burden on someone, and while many friends and family members are more than happy to take on that responsibility, it does not necessarily mean that they are the best choice your state plan.
I have put together a free on-demand workshop on trustee selection:
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