Choose Your Trustee (and Other Fiduciaries) Wisely
In the movie “Indiana Jones and the Last Crusade,” Harrison Ford and others had to make a choice which would either result in prosperity, or if they chose wrongly, impending doom. As the Grail Knight said in the movie, “choose wisely.”
This analogy can be easily applied to the selection of trustees and other fiduciaries in your estate planning documents.
The term “fiduciary” refers to persons serving as your representative in a variety of capacities, including as trustee under a Trust Agreement, personal representative (or executor) under a Will, agent under a Durable Power of Attorney, and Health Care Surrogate under a Living Will or Health Care Proxy.
Each of these positions requires a particular set of skills. The selection of the appropriate person or entity is often clouded by complications that can arise due to family relations.
For example, if a person has three children and names only one of them as their fiduciary, it could create resentment or animosity among the other children. This would especially be the case if your estate plan included an ongoing trust for the benefit of your children which requires the chosen trustee to make investment and distribution decisions that will have great impact on their siblings. On the other hand, choosing co-fiduciaries for the same position can be cumbersome, and can create serious disputes and animosity among the co-fiduciaries, which can end up being resolved in court. This can also cause the administration of the trust to in effect be frozen until the dispute is resolved.
If your children are not close and not getting along well while you are alive, chances are that will not change following your death. I have had clients say, “Well, they’ll have to get along,” and have seen first-hand that it usually does not work out that way.
Each of the fiduciary positions mentioned above requires special skills. A personal representative or trustee should be qualified to step in and handle your financial affairs, including investing of assets, gathering of assets, and bill-paying. The fiduciary does not have to be a professional asset manager, but if he or she is not, he or she certainly needs to competently hire somebody who is. Likewise, the person(s) chosen must have the time to commit to the job. Following a death, the personal representative and/or trustee must spend significant time going through the decedent’s paperwork and possessions, making sure they are secure, and ascertaining their value.
For the reasons cited above, it is often best to choose a corporate fiduciary. A corporate fiduciary is a trust company that is so licensed in the state of your residence. Traditionally, this would have been a bank trust department; now, most of the major brokerage firms have trust companies as well. Many clients, if choosing a corporate trustee, will want the assets to stay at the financial institution that they have been with during their lifetime.
The benefits of a corporate fiduciary are many:
- Employees of the trust company do nothing but administer estates and trusts on a full-time basis, so they are very experienced.
- The individual (and successors) that you name are subject to human frailties of illness, old age and death. While trust company employees are likewise subject to those frailties, there will be other qualified employees at the trust company that can step in.
- Having a corporate fiduciary can avoid creating animosity and resentment among your beneficiaries. Because the corporate fiduciary is not a beneficiary, it has no reason or incentive to make distributions in favor of one beneficiary over another.
- As professional investors, the corporate trust company is usually able to invest the assets more efficiently and profitably than an individual fiduciary. They will most likely have access to certain types of investments that an individual investor would not. Although the fiduciary will charge a fee for its services, in many cases, its investment performance will offset those fees.
An individual fiduciary is also entitled to charge a fee, but it is often waived in a family setting. If an individual does choose to charge a fee, it is taxable income to him or her, so if a fiduciary is a significant beneficiary of the estate or trust, it often makes little sense to take a fee.
In a second marriage situation, the choice of the personal representative and the trustee can be particularly difficult, especially in a situation where the assets are held in trust for the benefit of a surviving spouse, then ultimately passed down to the children of the first marriage. In such a situation, if the spouse is the trustee, the children will be concerned that the spouse is investing too much for income (and/or invading principal unnecessarily). If a child or children of the first marriage are the trustees, the surviving spouse could be denied the benefits of the trust that the grantor intended. That situation is another one that is often best solved by having a corporate trustee.
Living Will / Health Proxy
For the Living Will and Health Care Proxy, it is important that you make your wishes clear to your family members, and especially to your designated surrogate. You may wish to include specific language in your Living Will and Health Care Surrogate that outlines your wishes. Equally as important is to discuss your wishes with your surrogate(s) so that they can better carry out your wishes. Remember, when the health care surrogate needs to act, you will not be in a position to convey your wishes. If you were, the health surrogate would not be empowered to act.
The Living Will is a declaration that you do not wish to be kept alive by heroic measures, such as if you are on a feeding tube, in a persistent vegetative state, or on a respirator.
A Health Care Proxy is a power of attorney for medical procedures that covers any medical matter that you are not able to consent to, whether it is life-threatening or not. Your health care surrogate and living will surrogate should be the same people, as there is significant overlap in these documents.
In choosing a health surrogate, you should consider the following:
- Will the person(s) be able to emotionally face the decisions that could arise?
- Will animosity be created if one person is chosen to the exclusion of others?
- If multiple surrogates are chosen, will they be able to work well together?
Durable Power of Attorney
The Durable Power of Attorney names an agent to act on your behalf for financial matters. It is primarily used for assets that are titled in a person’s individual name (as opposed to a trust, for which the Durable Power of Attorney would not apply). However, under Florida law, if a homestead residence was transferred to a trust, the property could not be sold during the grantor’s lifetime without the signature of the grantor or an agent under a Durable Power of Attorney.
Florida law no longer permits a person to create a “Springing Power of Attorney”, in which a Power of Attorney only takes effect upon incapacity of the creator of the Power.
The power of attorney agent is typically the same as a trustee, but in many cases, a corporate trustee will not be willing to serve in that position.
Generally, any adult will be able to serve the various positions set forth above, subject to certain exceptions, such as somebody with a criminal record. However, under Florida law, a personal representative under a will must either be a blood relative or a Florida resident.
Your choice of fiduciaries is a very important part of the estate planning process. When you make your decision, you should consider not only the qualification of the fiduciary, but also the consequences of the chosen fiduciary or fiduciary’s authority to interact with any other fiduciaries, as well as the beneficiaries, both current and future.