by Steve Goodman
CPA, MBA – President & Chief Executive Officer
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A critical issue for people in the estate planning process is the selection of people to handle their affairs when they die or become incapacitated. The key positions to be filled include executors, trustees, and guardians. This paper identifies what these people do, how to select them, items to consider, and legalities associated with the positions.
An executor is a person who administers your estate through probate. The executor is responsible for collecting the assets in the estate, protecting those assets, inventorying the assets, paying all valid claims against the estate (including taxes), representing the estate in any pending legal actions or claims, and finally distributing the estate property to the beneficiaries.
The trustee’s job exhibits many similarities to the executor position with one significant difference. Whereas an executor’s job may take as little as 6 months to as long as 3 years to complete, a trustee’s position can last for generations. Many trusts survive through multiple generations. The trustee position has additional responsibilities associated with long term planning, investing assets, and on-going taxation and administration responsibilities.
A guardian is a person you will entrust to care for your dependents. The guardian is the person who will raise your child if you are unable to do so. The guardian is the person most likely to shape your child’s future in your absence. There is always an emotional component in selecting an executor or a trustee. When the time comes to select a guardian, the emotion factor plays a large role in the selection process.
The law requires an estate to have an executor. If your will does not specify an executor, or if you do not have a will, the court will appoint one. Executors have legal responsibilities in the execution of their duties. Smaller and less complicated estates frequently name a relative of the deceased. Proximity makes the job easier, but it is not required that they executor lives near the deceased. Larger and more complex wills may specify a legal or financial firm as the executor.
Executors can hire professionals to assist them in the execution of their jobs. An attorney and/or accountant is frequently brought in to advise the executor. The typical layman may be unfamiliar with the specifics of the executor job.He/she may need assistance handling filings with taxing authorities, creditors, contractual matters, and complications arising from the death of the estate owner.
The executor may be charged with liquidating assets if there is insufficient cash to pay claims against the estate. The will may also impose additional duties on the executor beyond those typically performed.
The primary choice when selecting an executor is whether to opt for a professional executor or select a layman, usually a close relative.
Reasons to Hire a Professional
- No conflict of interest. The paid executor is not a beneficiary of the will. This minimizes will related family disputes.
- Families with existing internal conflicts are best served by an outsider lest those conflicts become even more aggravated.
- Spouses may be overcome with grief, illness, or disability. If the executor fails at his/her duty, the estate could become liable thereby threatening the spouse’s financial future.
- The executor may have the responsibility to collect outstanding accounts and notes due to the estate. Some of those loans may be old family friends placing a family member executor in a very uncomfortable position.
- If the estate owner was aware of the possibility of future lawsuits, the entire estate is best left in the hands of an experienced attorney. Reasons to Appoint a Relative or Family Friend
- Professional executors can be costly. This is especially true in simple wills with little probability of legal action against the estate. There is no need to pay an attorney for more than the legal aspects of the job. A layman can handle most of the activities with some guidance.
- If the estate is under $500,000 and clear of legal issues, if the family is not dysfunctional, and if the will is clear in its instructions, the layman, assisted by an attorney, will do a satisfactory job. He/she may not be as fast as a professional, but it will get done.
- Many states impose maximum estate fees on attorneys. Some specify a set hourly rate while others specify a percentage of assets limitation.
- Some states impose restrictions on executors who are also attorneys for the estate. They can collect either an executor’s commission or attorney’s hourly fees but not both. In these state’s, hiring an attorney as an executor can be a good deal.
- Executors cannot be minors, convicted felons, or non-US citizens.
- Some states impose requirements that out of state executors either be a primary beneficiary or close relative. Some will require that the executor post a surety bond or engage a state resident to be his/her representative.
- If an executor is not able to handle the job or dies, it is important that the will specify a successor executor.
- A person with a living trust wants to name the same person as executor and either trustee or successor trustee (the grantor is typically the trustee of a living trust while he/she is alive and in sound mind.) Lawyers strongly advise against having two different people in those roles.
Recommended Executor Powers
State laws extend certain authority to executors. Wills can provide additional authority to facilitate their jobs and reduce the need to obtain authority from a judge.
Recommended authority includes the following:
- Power to hire professional help. If one is going to ask a relative or friend to handle the executor role, give them the authority to hire the people they need to do the job efficiently and correctly.
- Power to keep selected types of property in the estate. State laws may require the disposition of non-productive assets from the estate. These properties may include a family owned forest preserve or intentionally undeveloped area.
- Power to run the business. A business can deteriorate quickly following the death of a CEO and founder. The power to run the business allows the executor to either run or appoint a temporary CEO immediately.
- Power to dispose of, mortgage, lease or purchase real estate.
- Power to take out loans – this can be especially important in asset rich, cash poor estates needing to pay tax bills.
- Power to maximize tax savings – including the power to file a joint tax return with a surviving spouse.
Trustee responsibilities, selection, and other concerns is a broad topic. There are different kinds of trusts. There are primary trustees, successor trustees, co-trustees, professionals, and family members. Executor assignments typically last a few months to a few years. Trusts can exist for many generations. Due to longevity and complexity, the selection of a trustee is a major concern in estate planning.
Living Trusts – Almost all living trusts established for the purposes of probate avoidance or property management have the grantor as the trustee. Joint marital trusts typically name both spouses as trustees. When one dies, the other becomes sole trustee. Deviating from naming both spouses as trustees in a joint marital trust can result in complications. Should the grantor and sole trustee die or become incapacitated, the successor trustee assumes authority. The assets in the living trust and the lifespan of the trust will guide the grantor and the estate planner in the characteristics of the trustee. Living trusts in which the principal asset is an operating business run by the grantor may call for a successor business manager to also be the successor trustee.
Living trusts established for the purpose of tax avoidance should avoid naming the grantor as trustee. The optimal choices are either a primary beneficiary or an independent trustee.
The lifespan of a trust can be months after death through many decades after death. The longer the lifespan, the greater the benefits of hiring a commercial firm, such as a bank, to assume the trustee role. Presumably, the bank will continue to function 50+ years later. A specific individual is destined to die at some point. When that occurs, it could trigger a power struggle between the trust’s beneficiaries and the selection criteria identified in the trust document.
Some grantors will specify co-trustees. Most typical of these arrangements is one family member, often a beneficiary, and an independent attorney or financial professional. A business-minded beneficiary or family trustee can typically hire an attorney as needed. There is no significant benefit to be gained by co-trustees in which one is an attorney.
The American Bar Association warns that fiduciary tax returns can be complex. They note that the IRS finds them fertile ground for adjustments making them highly susceptible to audits.
It is also important to note that some tax-saving trusts are prohibited from using family members, especially spouses, as trustees. For this and other reasons, an attorney should always be consulted when selecting a trustee.
Reasons to Hire a Professional
- Many trusts last for multiple generations. A bank or similar trust management company will maintain consistency over the trust’s existence. The person managing the trust may change, but the firm will continue to service the account without interruption.
- Professionals manage trusts for a living. They stay current with changes in tax laws. Many of these organizations have departments that can handle specific problems with a full understanding of recent or pending tax and legal changes.
- Professional firms maintain strict compliance standards. Trust management activities require documentation. The organization should regularly review trust activities. Should something occur that is illegal, these firms are well insured.
- Should the beneficiaries decide they are unhappy with the way funds are distributed or how the trust is being managed, the conflict will pit the family members against the trustee. While not a positive situation, it is preferable to a family vs. family dispute.
- The trust beneficiaries are children or special needs individuals. These cases imply longevity and require knowledge that a layman is unlikely to possess.
Reasons to Select a Family Member
- As a rule, the family member trustee is someone with a significant stake in the trust. They take the trust’s success personally. They are likely to make every effort to do the job to the best of their ability.
- They often will not charge a fee. If they get paid at all, it is typically a nominal amount. Professional trustees typically charge a percentage of assets under management subject to a minimum charge. The costs can be significant for a modest-sized trust.
A rule of thumb in selecting trustees is that the larger the trust, the more important that the trustee is a professional.
Appointing three or four children as co-trustees can be a recipe for problems. If the grantor cannot select one child, it may be better to hire a professional. Money can divide people. At least with an independent trustee, the children have a common interest.
Removing a Trustee
Some grantors will specify the procedures and terms under which a trustee can be removed. Experts are of two minds in considering this subject. Should the trustee prove incapable, impersonal, unresponsive, and careless, the beneficiaries have just cause to want another trustee. However, the beneficiaries’ ability to remove the trustee makes it possible for the beneficiaries to bully the trustee.
If the grantor is going to provide the beneficiaries with some redress in replacing a trustee, one option is to allow for a replacement only on like terms. Assuming a professional trustee with bank A currently has the trustee position, and the beneficiaries want the trustee replaced, only another independent trustee from a similar financial institution can be given the position. This allows the beneficiaries to remove an individual but not the trustee’s independence.
Many experts recommend that the grantor should either avoid a clause giving beneficiaries the right to replace a trustee or grant that right to an independent third party. The independent third party could be the family law firm or accounting firm. Removing a trustee can result in legal challenges and expensive accounting bills. The dismissal may require building a case and presenting it to a civil court.
Selecting an executor or a trustee is often a business decision. The grantor’s attorney, accountant, and close friends may weigh in with opinions as the type of person that should be appointed. While there is an emotional component, it is very much a business decision for the financial benefit of the beneficiaries.
Selecting a guardian is a much more personal decision. A guardian’s role is to raise someone’s children should they be incapacitated or dead. The person selected will mold your child’s beliefs and attitude on life. The guardian will become the most influential person in your child’s life.
When selecting a guardian, the families are always present. The average family consists of two parents, each with a family who may want to raise the children. The pressure and politics can become overwhelming. But in the interest of the child, one must decide. Failure to decide empowers the court system to make the decision for you. With the parents out of the picture, and both families wanting to raise the children, the legal proceedings can turn ugly. For the sake of the children and their relationship with the parent’s families, the responsible action is to name guardians for the children.
There are few topics that bring out family politics like the guardianship decision. Sometimes, the best choice is a close friend. Friends tend to be the same age as the parents. They tend to have children about the same age. If they have been raised under similar conditions, they may have similar outlooks and values. The family remains the most popular choice, with friends growing in popularity for guardianship each year.
Some people may not feel up to the job. Their rejection of your offer to serve as guardian may be made with all sincerity in the best interest of the children. Yet people change over time. The person who deferred an opportunity to become a substitute parent when your children were toddlers, may be a very different person when your children are approaching their teens. Guardianships do not have to be permanent. People change. Relationships change. In the best interests of your children, it may be necessary to change their guardians.
The following list identifies items of concern when selecting a guardian.
- Guardians care for children. Trustees manage money. There may be reasons to separate the two functions, though it is not common. If the same person assumes responsibility for the children and the money, there is no oversight on how the children’s money is being spent. Yet to split the responsibilities may be taken as an insult by the guardian. One recommended method around this concern is to appoint the guardian and an independent party as co-trustees of the children’s funds. It can be explained to the Guardian that the co-trustee brings professional money management to the children’s money to assist the guardian.
- When selecting a guardian, hire for skills and attributes. If you are looking for someone to manage the children’s inheritance, the financial person in the family may be best. But that does not make him/her the best choice to raise children.
- If you have many children, it may be too much to ask one couple to take on the responsibility to raise 4 or more children. It can be painful to split one’s children into multiple families. But if one family cannot maintain their standard of living by accepting your children, the alternative may be worse.
- You want to identify someone who will bring up your children to be the people you hope they will become. Your guardian should share your values, goals, and style.
- You want someone who can afford to raise your children. Just as importantly, you want someone who is unlikely to become resentful that your children have more funds available to support their lifestyle than the guardian’s children. One solution is to find a guardian with more money than the parents, though this is not always possible. An alternative is to provide equal treatment for the guardian’s children through trust. If your child has the opportunity to go to a private camp, then all the children have access to funding to afford private camp. If the house does not have the room to properly house the children, target some of the children’s capital to adding on to the house. If the guardian does not have adequate capital to sustain the children’s lifestyle, help the guardian financially to integrate your children into their family with minimal physical or psychological disruption.
You want someone who you reasonably expect will live long enough and be healthy enough to raise your children to adulthood. Older parents are not a good choice for young children for this reason.
- Get the guardian’s approval. Before you put your choice in your will, make sure your choice understands the responsibility and wants the job.
- Put it in writing. If the courts will not recognize your choice, then all the decision making and concern were for nothing. Finish the job and put it in writing.
- Name a back-up. If the guardian is unavailable when needed, your children’s fate is back in court. This is not a choice you want to leave to the courts.
- Tell the family. Find a way to not hurt anyone’s feelings, but make your choices known. Do not leave people wondering in the moments after your tragic death what will happen to your children. Let them know your choice so they may start the transition process for the sake of your children.
CPA, MBA – President & Chief Executive Officer
About Steve Goodman
For more than 30 years, Steven has provided insightful solutions to the challenges of business succession, wealth preservation and charitable planning, focusing on the needs of owners of closely held businesses and high net worth individuals.
He's been featured in the New York Times and is an accomplished speaker and has presented over the years to many organizations and professional groups on efficient business succession, estate planning issues and tax strategies. Steven is a CPA who was vice president of the Trust and Investment Division of JP Morgan Chase and a supervisor for KPMG Peat Marwick, and holds an MBA from Fordham University.