One of the most important decisions to make when creating or updating your estate plan is choosing which trusted individuals or entities you wish to appoint to serve as your fiduciary.
For purposes of your Last Will and Testament, this means naming a Personal Representative (or Executor) to administer the estate, a Guardian for your minor children (if applicable), and a Trustee for any ongoing trusts that will be created under your Will. If you are creating a Revocable Trust to plan for incapacity and avoid probate, you will also need to name a Successor Trustee(s) or Co-Trustee. In addition, you will need to appoint an Agent under both your Durable Financial Power of Attorney and Health Care Power of Attorney/Advance Medical Directive to make financial and health care decisions for you in the event that you are unable to act on your own behalf.
If you are being asked by a loved one to serve as a fiduciary, the responsibilities and potential liability that come along with the role should be carefully understood before agreeing to serve.
A Personal Representative (also known as an Executor) is appointed under the terms of your Last Will and Testament, and is responsible for wrapping up your final affairs and ensuring that your assets are managed and distributed in accordance with the terms of your Will. Upon your death, all assets titled in your individual/sole name that do not otherwise pass by beneficiary designation will become part of the probate estate. The Personal Representative is responsible for managing and preserving your probate assets until the estate is ready to be distributed to your beneficiaries.
The Personal Representative can be an individual, professional or corporate fiduciary. Duties of the Personal Representative during the administration of an estate include but are not limited to:
• Gathering and valuing all probate assets, and managing preserving and selling probate assets as necessary;
• Payment of any creditors’ claims against the estate;
• Payment of outstanding bills due at the time of your death, as well as any expenses incurred in the course of administering your estate;
• Filing all necessary paperwork with the probate court (i.e., inventory of probate assets, accounting of estate expenses and distributions); and
• Preparation and filing of your final Federal and State income tax return, Federal and State income tax returns for the estate, and Federal estate and/or gift tax returns, as required.
After all creditor claims, final bills and expenses and taxes have been paid and the probate process has been completed, the Personal Representative will distribute the remaining estate assets to the beneficiaries in accordance with your Last Will, including transfers to any ongoing trusts. Once this final distribution has been made, the Personal Representative’s duties will generally be completed, and the Trustee will take control of any ongoing trust assets.
Generally, married individuals name their spouse as Personal Representative; however, a successor Personal Representative should be named in the event that your spouse is unable to serve. The successor Personal Representative could be a parent, sibling, or friend, or a professional or corporate fiduciary. In most cases, family members and friends who serve as Personal Representative hire an attorney to assist them with the estate administration process.
The Trustee is responsible for managing and preserving assets held in trust (whether revocable or irrevocable), and administering and distributing the assets in accordance with the trust terms. Serving as a Trustee is a long-term commitment and responsibility, and often involves coordination with lawyers and accountants and detailed record keeping.
If you are creating a Revocable Trust to avoid probate and plan for incapacity, you are typically your own Trustee (or Co-Trustee with your spouse or other trusted individual or entity) during your lifetime so long as you have capacity. You should also name a Successor Trustee to act in the event of your incapacity or if you are otherwise unable to serve; this person/entity is generally the same person/entity you name as your Personal Representative and Agent under a Durable Financial Power of Attorney.
The Trustee appointed in connection with a trust for your spouse, children/descendants or other designated beneficiaries (for example, a Marital or Family Trust created at your death) can be either an individual (spouse, adult child, or other trusted family member or friend), a professional (attorney, accountant or other trusted advisor), or a corporation (bank or trust company). If you are selecting an individual to serve as your Trustee, careful consideration should be given to the Trustee’s fiduciary responsibilities and the prospective Trustee’s qualifications and willingness to serve. If you cannot identify an individual who could serve as a Trustee, consider appointing a professional Trustee (or Co-Trustee).
The following is a summary of the roles and responsibilities of a Trustee. Depending upon the terms and holdings of the trust, the Trustee’s duties will include but not be limited to:
• Assumes legal/fiduciary responsibility for the proper administration of the trust;
• Pays bills and establishes bookkeeping procedures;
• Reviews assets regularly for quality and performance;
• Monitors and makes appropriate adjustments to the trust’s investment portfolio, typically in consultation with an investment advisor (or Investment Manager in the case of a directed trust);
• Arranges for the security, insurance, and maintenance of personal residences and other real estate owned by the trust;
• Manages any business and other closely-held interests owned by the trust;
• Coordinates and structures trust transactions to minimize taxation;
• Maintains detailed records of all assets and transactions;
• Distributes income and principal to or for the beneficiaries;
• Files annual trust tax returns;
• Furnishes information for beneficiaries’ tax returns; and
• Arranges for and completes final transfer/distribution of assets in accordance with the trust terms.
For more information on selecting a trustee, check out this handy checklist: ACTEC What It Means to Be a Trustee – A Guide for Clients.
The Guardian is the individual appointed under your Last Will and Testament to take custody of your children if they are minors at the time of your death and you are not survived by the child’s other parent.
Careful consideration should be given in designating a Guardian in terms of their ability and financial resources to properly care for your children, whether they will need to relocate to and live in the children’s existing residence, take custody of any pets, etc. Typically, the Guardian coordinates with the Trustee of any ongoing trust for your children (who is ideally someone other than the person serving as Guardian) to ensure that the trust assets are being used and expended for the children’s benefit.
Under a durable power attorney, an Agent is appointed to manage the Principal’s affairs if the Principal is disabled or otherwise unable to make decisions or take action on their own behalf. An Agent can only take actions that are in Principal’s best interest and for the sole benefit of the Principal.
Typically, spouses will appoint each other as the Agent under their respective Durable Financial Powers of Attorney to manage financial affairs in the event they are unable or unavailable to do so. Alternate Agent(s) should also be named.
Under a Health Care Power of Attorney/Advance Medical Directive (also called a Living Will), an Agent is appointed to make health care decisions on your behalf in the event that you become unable to do so. A Health Care Agent can help make medical decisions on your behalf at the end of life or any other time you are unable to communicate, such as if you are severely injured in an accident.
Without the existence of a validly-executed Durable Financial Power of Attorney, initiation of a guardianship proceeding by you spouse or other family member would be required, in order for a Guardian to be appointed by the court to handle your financial affairs in the event of incapacity. Guardianship proceedings can be costly and take weeks or months to resolve.
Similarly, without the existence of a validly-executed Health Care Power of Attorney/Advance Medical Directive, although your spouse/next of kin would have the power to make health care decisions on your behalf, your wishes may not be known and conflicts can arise among family members, which may also require initiating a costly and time-consuming court proceeding to appoint a guardian for health care matters.
When selecting an individual to serve as a fiduciary, always designate a successor/alternate in case your first choice is unable to serve. For longer term trusts, it often makes sense to name a corporate trustee as the final successor to ensure ongoing continuity of management of the trust assets.
Always include a power to remove and replace a fiduciary in the governing document, especially when naming a corporate fiduciary. Consider naming a Trust Protector to exercise this power on behalf of the trust when necessary. If a beneficiary is given the power to remove and replace the Trustee, it is generally advisable to require the appointment of an Independent Trustee in place of any Trustee that is being removed.
Consider naming an independent professional or corporate Trustee (or Co-Trustee) to prevent unforeseen conflict between family members, siblings, spouse and children of a prior marriage, etc.
If naming co-fiduciaries, give careful consideration to how decisions will be made between them (e,g,, whether unanimous consent or majority vote is required, and how potential deadlocks will be resolved), and whether they will have the power to delegate tasks to and among each other for ease of administration purposes.
SageTrust™ Law Group can advise individual fiduciaries on their duties and responsibilities, and also serve in the role of a professional fiduciary for select clients. For more information and advice on choosing a fiduciary, please contact us to schedule a consultation. Don’t Worry, We’ve Got This!