Choosing the right person to manage your affairs when you die or if you become incapacitated isn’t easy. It can be even more challenging if you aren’t married and don’t have appropriate family members available to step in.
Your parents, children or siblings may either not be available, or not the right fit. Or maybe they feel like those who would be available don’t have the knowledge, discipline or time required to effectively oversee financial matters. The process of having someone manage your affairs when you are no longer able to can be quite complicated. It’s therefore extremely important to select capable fiduciaries.
Typically, the decision-makers they need will include:
- A successor trustee to administer revocable trusts you’re responsible for during your lifetime if you become incapacitated and distribute any remaining trust assets or continue administering the trust (depending on its terms) when you die.
- An agent appointed as financial power of attorney to make financial decisions for you related to any assets held outside of your trusts (for example, retirement accounts, brokerage accounts and personal bank accounts).
- An agent appointed as healthcare power of attorney to make healthcare decisions on your behalf in the event of incapacity.
- An executor to handle the settlement of your estate and the distribution of any assets held in your individual name upon your death.
It can feel like an honor to be asked to fill one of these roles, but it also can be time consuming, complex and fraught with liability.
Consider the Qualities You Need
So, what qualities should you look for when making these critical decisions? Here are a few essential qualities to consider:
- Trustworthiness. You need to have complete confidence in your fiduciaries’ commitment to putting your interests, and those of your beneficiaries, ahead of their own.
- Financial competency. Your successor trustees, executors and agent for financial decisions all must have a solid financial knowledge, money management skills and a strong understanding of their fiduciary duties.
- Availability. You should name someone who has the time to dedicate to the work that needs to be done; from discussions with investment managers to responding to beneficiary requests and tracking down property interests.
- Delegation. Look for someone who possesses the most important skill of every successful manager: an ability to identify and surround themselves with the right advisors (attorneys, CPAs, financial experts) to handle what needs to be done.
Consider everything that will be required to settle your estate after you die. Your executor or trustee is likely to need at least six to eighteen months to:
- Identify, collect, value and sell all their assets
- Pay all outstanding debts, liabilities and expenses
- Ensure that all assets are managed prudently and in line with the estate’s distribution and liquidity requirements
- Prepare and file all estate tax returns, income tax returns and court- mandated filings
- Distribute assets according to the terms of your will and trust documents
These responsibilities don’t just take time, they require careful attention to detail and financial knowledge. Your trustee or executors may also need to make difficult asset distribution decisions, such as when tangible property needs to be divided among your beneficiaries. And keep in mind that any errors or omissions could subject your fiduciary to personal liability. You may think that by appointing someone it’s a sign of the faith and trust they have in them. But make sure you take time to do an honest evaluation and have an up-front conversation about your intentions. You should make sure they’re not just able to perform the required duties—but also ready and willing to carry them out.
Understand the Benefits a Professional Fiduciary Can Provide
Traditionally, corporate trustees (financial institutions) were considered- when there weren’t family members or trusted individuals around to act, or conflicts required a neutral party. Nowadays, a professional fiduciary is often chosen even when competent individuals are available. This is because of the expertise, know-how, availability, ability to act quickly, unbiased objectivity, and professionalism that a professional fiduciary brings to the table from handling hundreds of different trusts and estates.
Unlike banks, financial advisors, or corporate trustees (who profit from fee income derived from assets invested), professional fiduciaries are completely independent, usually earn set hourly fees, and therefore are free from conflicts of interest. A good private professional fiduciary can bring experience, organizational skills, and objectivity while providing and maintaining a personal relationship that likely would not exist with a corporate trustee, such as a financial institution. And they’re able to offer extensive in-house and third- party expertise to effectively manage even the most complex assets.
But it’s important to know that choosing between an individual or professional fiduciary isn’t an either/or decision. Instead, involving a professional fiduciary gives you flexibility to create a structure that works best for your particular needs, for example:
- A professional fiduciary as agent for an individual trustee or executor—where all decision-making power lies with the individual but the individual hires the professional fiduciary to do all or a portion of the work of the trust or estate administration.
- A professional fiduciary with individuals as agents— where the professional fiduciary assumes responsibility for your major assets upon your incapacity (for example via a trust), but individuals are in charge of all personal decisions, including health care and day-to-day financial decisions.
- A professional fiduciary or with a special advisor — where the professional fiduciary holds the final decision-making power but is directed to consult with individuals you designate in advance, prior to making major decisions.
While professional fiduciaries are often perceived as an expensive option, it’s important to remember that individuals are also entitled to compensation when acting as a fiduciary. Since individuals typically don’t bring the in- house expertise as professional fiduciaries, it’s often the individual who ends up being the more expensive option.
Don’t Forget to Put the Right Foundation in Place
One most important decisions you make in the estate planning process is the selection of who will represent you when you can no longer act for yourself. Naming the right fiduciaries to manage your affairs in your absence is critical part of ensuring that your legacy goals are fulfilled. By knowing your range of options and choosing wisely, you can protect your beneficiaries, and help to preserve harmony through a difficult and stressful time.
