Choosing the Right Fiduciary: Trustees

This the fifth and final segment of our Choosing the Right Fiduciary series where we cover trustees. 

Trustees are best saved for last because their duties often overlap with the duties of agents under powers of attorney and health care powers of attorney, as well as executors.  Yet, naming a trustee is unlike these other positions because a trust is an incredibly flexible document.  Before diving into the substance of this post, a few key terms to note:

            Grantor/Settlor:  The person who creates the trust.

            Beneficiary:  The person whom the trust assets are meant to serve.

Revocable vs. Irrevocable:  Trusts can be either revocable or irrevocable.  In a revocable trust, the grantor has full power to amend or revoke the trust during his or her lifetime.  An irrevocable trust, on the other hand, cannot be revoked or amended by the grantor once executed.  This distinction is important because the tax treatment of these two types of trusts can differ and, in some cases, only certain people can be named as trustee.

Trusts may be created to achieve many different goals.  One of the most common trust arrangements is a revocable trust created by the grantor to serve as a will substitute.  The grantor serves as the trustee of his or her revocable trust during the grantor’s lifetime.  He or she may title assets in the name of the revocable trust and may name the revocable trust as the beneficiary of insurance policies or retirement assets.  If the grantor becomes mentally incapacitated, the successor trustee is authorized to step in and manage assets on behalf of the grantor.  Therefore it is desirable to name a trustee who will coordinate well with the agent named under the grantor’s power of attorney and the grantor’s health care agent.  Clients often name the same person to serve in all three roles, which creates efficiency.  However, be aware that the more “hats” a fiduciary is wearing, the less oversight there is over his or her actions.  As has been stated throughout the series, absolute confidence in the named trustee’s abilities and integrity is paramount.

At the grantor’s death, the trust becomes irrevocable and functions like a will – it directs assets to the grantor’s desired beneficiaries, often outright.  In this scenario, the clients frequently name the same person to serve as executor and trustee because the primary purpose of the trust is to direct assets at the grantor’s death.  The trustee’s responsibilities – locating heirs, distributing assets, etc. – are often very similar to the duties of an executor, but without the government oversight and reporting requirements. 

If assets are directed to be held in continued trust, the trustee’s role more closely resembles that of a guardian of property.  The trustee manages assets for the beneficiary, according to prescribed terms in the trust about how the assets should be used and when distributions should be made or withheld.  In this case, the right person to serve as trustee would be familiar with the beneficiary’s potential needs and obstacles.  Clients often name a guardian or other close relative to serve in this role because he or she is in a strong position to observe and interact with the beneficiary.  A trustee who is named to serve for a trust with multiple beneficiaries has the special challenge of weighing each beneficiary’s needs and avoiding preferential treatment of current beneficiaries over remainder beneficiaries (unless the trustee is specifically directed otherwise by the terms of the trust).  Trustees should also be strong decision makers, because beneficiaries may have opinions about the desired frequency and amount of distributions that the trustee considers inappropriate or ill-advised.  Many clients also prefer to name trustees who share the clients’ values (particularly if assets are held in trust for their children) so that those values may be passed on in the clients’ absence.

Though great consideration must be given to a trustee’s relationship with beneficiaries and ability to understand the grantor’s intent while also weighing the beneficiaries’ needs, the trustee role also requires proficiency in managing assets.  Beneficiaries are entitled to annual accountings of trust activity, so it is best to name trustees who are reasonably savvy when it comes to finances and record-keeping.  One way to accomplish both goals is to name co-trustees with different strengths who can work together, including professionals or individuals with a financial background.  The trustee is responsible for filing tax returns on behalf of the trust, which can be complicated and time consuming depending on the nature and purpose of the trust itself.  Finally, keep in mind that for some types of irrevocable trusts the class of people who may serve as trustee is limited if the desired tax result is to be achieved.

When the right person is serving as trustee, trusts are incredibly useful tools that can accomplish a wide variety of objectives.  The best choice of trustee will depend upon the goals of the grantor, the potential needs of the beneficiaries, the assets to be managed, and other circumstances particular to each trust.

We hope you have enjoyed the Choosing the Right Fiduciary Series.  Contact us today to learn more about creating an estate plan and selecting the best people to manage it.

Below are links to the four earlier articles in our Choosing The Right Fiduciary Series, if you missed them:

1. CHOOSING THE RIGHT FIDUCIARY

2. CHOOSING THE RIGHT FIDUCIARY: FINANCIAL POWERS OF ATTORNEY

3. CHOOSING THE RIGHT FIDUCIARY: HEALTH CARE POWERS OF ATTORNEY

4. Choosing The Right Fiduciary: Executors

Jennifer Schooley  |  Contact  |  Estate Planning

Choosing the Right Fiduciary: Executors

Pick me! Pick me? Pick…ugh, her?

This is the fourth installment in our blog series on Choosing the Right Fiduciary, discussing how to select the best executors for your will and asset distribution, among other things.

Many people have the impression that being chosen as the executor is being chosen as the anointed one, rather than viewing it as the job that it actually is.  According to Webster’s, an executor is “a person or institution appointed by a testator [that is, the person making the will] to execute a will.”  This sounds pretty straightforward.  In reality, an executor’s duties can be complicated.  The actions of executors are governed by extensive state law and are overseen by various government authorities.  Below are just a few of their obligations:

• qualifying before the circuit court probate division
• gathering assets of the deceased person, including tangible personal property (things you can touch or move) and intangible property (accounts, etc.)
• locating and notifying heirs and/or beneficiaries
• filing an inventory with the Commissioner of Accounts detailing every asset of the deceased person’s estate
• keeping detailed records of income and expenses of the estate (including paying final debts and taxes)
• filing accountings with the Commissioner of Accounts showing income received, expenses paid, and distributions made to beneficiaries
• filing the decedent’s final tax return (and any prior years the decedent failed to file)
• filing the estate’s tax return

Executors can be exposed to personal liability if they make mistakes during the course of estate administration, and can even be sent to jail for failing to fulfill their responsibilities.  It is not a task to be assigned or undertaken lightly. Many people who have experience as executors are less than eager to go through it again, so it is extremely important to use care in choosing the best person for the job.  However, with proper planning, it is possible to create a smooth process for your executor and even minimize his or her obligations.

The best choice for an executor will be scrupulous, organized, and tactful in moderating potential conflict between heirs.  Many executors struggle with the reporting requirements to the Commissioner of Accounts, so it can also be helpful to name someone with financial experience and/or familiarity with your assets.  Your executor will have complete control over your “probate” estate (some assets pass outside probate by beneficiary designation, deed, or title – these assets are not subject to your executor’s control).  This creates an opportunity for theft and can also create tension between your named executor and any beneficiaries of your estate who are not serving as co-executors.  Another challenge is that out-of-state executors are often required to post a bond with the Circuit Court, an expense that must be paid out of pocket by the executor (although he or she can be reimbursed once the estate is open).  In order to qualify for a bond, the executor must have good credit and a clean financial record.  It is possible to name more than one person to serve together as co-executors, so naming a professional and/or Virginia resident to serve as a co-executor is one way to mitigate these concerns.

Making a strong choice of executor is a major step toward a smooth administration process, but you should also provide clear instructions for your executor about where to find your will and assets, particularly when you no longer have paper statements.  Remember that your named executor is under no obligation to accept, so the more orderly your affairs are, the more likely it is that your desired executor will take on the responsibility.  If chosen correctly, the executor will understand exactly what they are getting into, with no illusions of glory or prestige, leading to a greater likelihood of acceptance and a smoother administration process.  Contact us for more information about wills, executors, and creating an orderly estate plan.

Choosing the Right Fiduciary: Health Care Powers of Attorney

This is the third installment in our blog series on Choosing the Right Fiduciary, discussing how to select the best agents under a health care power of attorney.

The people you name to act as your agent under a health care power of attorney are responsible for making your medical decisions if you are incapacitated and unable to do so for yourself.  In the absence of a health care power of attorney, Virginia law identifies the people who are authorized to make those choices; however, clients generally prefer to be more specific about who will manage their health care and treatment.

It can be helpful to name a friend or family member with a medical background.  Clients with a nurse or doctor in the family often name that person as their health care agent because he or she will have a better understanding of the client’s condition and the decisions that should be made.  Your health care agent should also be familiar with your personal values – for example, knowing your end of life wishes and whether your religious beliefs would affect your treatment plan. 

Personality can be a major factor as well.  Look for someone who stays calm in emergencies, is able to make quick decisions, and can communicate those decisions clearly to the rest of your loved ones.  Situations where you are abruptly incapacitated because of a medical problem can be very high stress for the people who care about you.  Another factor to consider is that a person’s incapacity may not be temporary, or short-lived.  Health care agents can become overwhelmed when they become responsible for the long-term care of someone who is incapacitated, so it can be a good idea to choose someone who is conveniently located and has a flexible lifestyle.  Complex family dynamics can add to that stress for the person you have entrusted with this responsibility. Naming a strong decision-maker whose choices will be trusted by others can help minimize disagreements surrounding your medical care.

Another way to reduce conflict about your health care is to include an advance directive (sometimes called a “living will”) with your health care power of attorney.  This is your declaration to your doctor that you wish to be removed from artificial life support if your doctor has determined you are terminally ill or in a persistent coma and unlikely to recover.  This can be a powerful tool to effectuate your wishes and to release your loved ones from the burden of making that final decision.

Keep in mind that you can name anyone to act as your health care agent, whether that is a family member, a friend, or a trusted employee or neighbor.  We can help you identify your options, but ultimately you are in the best position to determine who should be named to act in this capacity.

Jennifer Schooley  |  Contact  |  Estate Planning

Choosing the Right Fiduciary: Financial Powers of Attorney

This is the second installment in our blog series on Choosing the Right Fiduciary.  This week, we discuss how to select the best agents under a power of attorney.

An agent under a durable general power of attorney is empowered to carry out almost any action you (called the ‘principal’) could take for yourself with regard to your assets and finances.  Many clients choose to name their spouse as their agent, which can make sense because a spouse is often well-positioned to be familiar with financial affairs and can be one of the most trusted individuals in a person’s life.

Clients who are unmarried or for whom it is not desirable to name a spouse sometimes struggle with this decision, however, and married clients can have similar trouble choosing back-up agents to serve if their spouse is unable to act.  Your choice may be guided by several factors, but the most paramount is trust.  The power granted under these documents makes abuse relatively easy and difficult to detect.  Consider naming family members or close friends who merit a high level of trust and do not have financial, addiction, or other troubles in their past that might render them vulnerable to temptation. 

Another factor to consider when choosing your agent is the relative complexity of your financial situation.  Agents under a power of attorney are typically called upon to pay your obligations and manage your affairs.  If your major assets are cash accounts, retirement assets, and a primary residence, the skills required for your agent to effectively handle your finances are substantially different from someone with interests in small business entities, investment real estate, or securities that are not professionally-managed.

Finally, consider naming someone you believe can be ‘neutral’ in exercising the authority granted under a power of attorney.  Agents have fiduciary duties to avoid conflicts of interest when acting on your behalf, but when family issues between siblings or step-relations arise, it can be difficult for someone who is emotionally invested to remain objective.  One might question how often an agent under a power of attorney could become entangled in such disagreements, but consider a child approaching the agent for an extension of an existing loan, or a second spouse requesting the agent’s cooperation in purchasing a marital residence or funding the spouse's long term care using the principal’s separate assets.  An emotionally-invested agent might even reconfigure beneficiary designations and transfer on death arrangements made by the principal to secure an estate outcome which he or she considers more just.  Another problem might arise if an agent (intentionally or otherwise) sells property that is given by specific bequest to a beneficiary under the principal’s estate planning documents to provide for the principal's support, rather than choosing a different asset to sell.  Naming agents who are suitably loyal to your own interests and values reduces the likelihood of these kinds of conflicts producing undesirable results.

Depending on the level of complexity your agent will be dealing with (whether that means financial or family complexity), it can be worthwhile to name a professional such as an accountant, attorney, or someone else with special skills that will increase the agent’s effectiveness.  Although this option can be more expensive, it might make sense if there is substantial risk in naming a family member or friend who may not be up to the task.  Agents who are already acting under a power of attorney can also benefit from engaging professional services to supplement the agents’ own knowledge and skill.

In case you missed the first part, Choosing the Right Fiduciary. And look for next week’s installment in our blog series on Choosing the Right Fiduciary – Health Care Powers of Attorney.

Jennifer Schooley  |  Contact  |  Estate Planning