"Only as Good as the Ingredients" - Selecting Fiduciaries for your Estate Plan
There’s an analogy, often applied in the context of coaching, that a “chef is only as good as her ingredients.” Even mastermind strategists and coaches can only go so far without talented players to implement their game plans. The same can be true in crafting your estate-plan.
As your counselors, we can help draft plans with thorough, well-stated directions and guidance for your fiduciaries (your executors, trustees, powers-of-attorney, and health-care agents), and good drafting can go a long way toward ensuring that your wishes are implemented appropriately. But—just as the best coaches out there are necessarily affected by the quality of the players on the field—so, too, will your estate-plan be impacted by the qualities of the individuals you put “on the field” as your fiduciaries. Being a trusted loved one is not always enough.
This morning, we met with a wonderful young couple. They were referred to us by a former client, who told them we made the process “fast and painless.” We certainly strive to make the process painless, but I cautioned them not to expect “fast.” Of course, we’ll endeavor to draft your documents promptly … but our consultation process is anything but “fast.”
Some attorneys (even very good ones) endeavor to keep estate-planning costs down by setting into motion an “assembly system” where they take an estate-plan form down off the shelf, ask you for some names, plug them in, and the client is “on their way” … maybe an hour later, on that same day. We don’t operate that way.
Instead, our consultation process is thorough. We’re going to ask questions (lots of them) about the family members, friends, or advisers you’re considering putting “on the field” as fiduciaries to implement your estate-plan. Again, being “trusted” and “loved” isn’t always enough. In fact, it rarely is.
Every situation is different, but as we ask client to consider their fiduciaries, the following factors tend to ring true across most estate-plans:
Your “executor” has a short-term job—generally of about six months, but it can run several years—and they are charged with collecting your assets (bank accounts, personal effects, you name it), shepherding them through the probate process, and distributing them to your beneficiaries (or to your trustee, if you implemented trust planning). For anything but the simplest estate, you primarily want an executor who knows enough to seek out professional guidance (an attorney, accountants, tax-advisers) through the probate process. Beyond that, you need someone who is organized, responsible, and has the ability (and time) to follow-through on instructions they receive from those professionals. All things being equal, having a local executor can be preferable. Having “boots on the ground” can assist in visiting local banks, packing up your effects, meeting in-person with your estate administration legal team, and helping expedite the administration process by being able to sign documents quickly. Furthermore, Mecklenburg County’s Clerk of Court requires that an out-of-state executor be bonded, even if you waived that requirement in your will, adding additional cost (in the form of a bond premium) to your estate-plan.
Executors rarely have to exercise much direction (compare that to the role of a trustee), so good judgment is always important, but perhaps not to the same extent as when selecting a trustee. And because an executor’s job is typically a relatively short one, going “up a generation” (i.e., to your parents) isn’t necessarily problematic.
A trustee’s job has similar fiduciary roles, but is markedly different in many respects. If you’ve selected a trustee to serve for your children, this job could span decades (many trusts for children run until the child is 35 or 40, even longer).
You want the same steadfastness and loyalty and responsibility you’ll want in an executor (or any fiduciary), but it’s even more critically important in the role of a trustee, for a number of reasons.
Firstly, having a trustee with some financial or investment wherewithal (or at least the ability to seek out and rely upon good advisers) can be critical. Because, again, the trustee may be in office for decades, the difference between prudent investment and average investment (let alone poor or neglectful attention to your trust portfolio) can mean hundreds of thousands of dollars in lost value for your trust.
Secondly, a trustee will typically be given “discretion” in the trust to make funds available (or not) for your beneficiaries, at various intervals. A good trustee needs to know and understand your intentions, and have the wisdom and fortitude to carry them out. Many clients want to ensure that their children have “enough money available to do whatever they dream, but without having the option of doing nothing at all.” Knowing when to open the trust coffers and make money available for your beneficiaries (typically children) requires some prudence and wisdom. (Should your trustee make a sizeable investment of trust assets in a business venture for a young beneficiary? Should that decision be different if the young beneficiary wants to launch a medical practice versus something more risky, like opening a restaurant?) This job can be all the more difficult for an individual or couple who die(s) young, when sympathy for the surviving children can sometimes compromise the good judgment of a trustee.
Thirdly, consider the impact of family dynamics when selecting a trustee. If a couple is looking to select a trustee, I often ask: do your extended families get along? If Spouse #1’s sibling is selected, will they have the unfettered support of Spouse #2’s family? Or are we opening up a situation that is ripe for discord?
Finally, while the age of your fiduciary isn’t as critical in the “executor” role, bear in mind that a trustee may serve for thirty or forty years — if you elect to go “up a generation” (i.e., to parents), it is important to have a successor trustee lined up to take over if your initial trustee ages to a point where they are no longer well suited to the office. (Recent studies indicate that 13.5% of adults aged 80-84 suffer from dementia, that figure skyrockets to 30.8% between ages of 85-89. And even before actual dementia sets in, the aging process often impairs an adult’s “executive functioning” capabilities – the ability to use good judgment without being unduly influenced by pressure from others – long before memory issues are apparent.)
Sometimes clients select a corporate (bank) trustee. While such corporate trustees do charge fees, of course, oftentimes the fees are well worthwhile — in the form of having a professional investment team in place. Consider the impact that a professional investment team might have on your portfolio; oftentimes the improved performance of your portfolio far surpasses the fees charged by the professional (corporate) trustee. Selecting a corporate trustee also means that you can count on a disinterested, professional fiduciary to make the hard decisions when it comes to discretionary distributions to your children: knowing when to say “yes,” and when to say “no.” Selecting a corporate fiduciary can also remove family dynamics from the equation, and relieve a couple of having to choose one spouse’s relative over the other’s.
Clients sometimes fear that when they name a bank, what happens if the trust officer with whom they’ve developed a personal relationship and rapport later change employers? We can certainly implement a “trust protector” who has the ability to remove and replace the corporate trustee (bank) with another corporate trustee, for instance to help your trust follow the specific trust officer you’ve grown close with.
Guardian for your Children
Perhaps there is no more important decision that you will make than deciding on a guardian to take custody of your children in the event of an untimely death. Consider the family situation of your proposed guardians (if you have four children, and your preferred guardian candidate has four children of their own, will it be feasible or practical to raise those children under the same roof)?
This is another situation where going “up a generation” has some benefits, but also some risks. While parents can often be obvious choices, and excellent guardians, there are some downsides too. How old will your parents be when your children are high-school aged? Will they be capable of handling some of the difficult parenting duties that are inherent today (i.e., monitoring children’s Internet and social media use)? Is there a chance that you’re setting your children up to lose not only their parents, but their surrogate parents (guardians) as well, before the child even finishes high school? Is it fair to ask your parents to forfeit their golden years and the comfort of retirement to dive back into another round of child-rearing?
If your children are of high-school age at the point where they might lose their parents, geography can also be a critically important factor. Even a relocation across town (let alone far away) can disrupt a child’s high-school placement (friends, teachers, guidance counselors), at a time when – by definition, having lost both their parents – stability and constancy can be critical. Do you have any guardian candidates who would be willing to move into your home and raise your children, so that your children do not need to be displaced from the comforts of their familiar support setting? (We are reminded of a case where we assisted a family, with four high-school-aged children that were orphaned – three of whom were triplet rising-seniors in high school! – but whose mother’s documents appointed a guardian in another country. Had we not been able to persuade a Court to ignore that recommendation, these children who lost their last surviving parent could have been moved abroad right in the middle of the college application process, and while enjoying their senior year of high school, as best they could under the circumstances.) In any event, the lengthy court process of installing a different guardian was far more expensive than investing a little extra consultation time in the estate-planning process.
Guardians and Trustees
It can be convenient to name the same person as both legal guardian for your children, as well as trustee over their trust. But this scenario has some risks as well. Even the most well-intentioned guardian-trustee may be able to persuade themselves to spend trust funds on items that do not exclusively benefit the children. (For instance, a new wing on the guardian’s house, built with your children’s trust funds, purportedly because it was convenient to have additional space with which to raise the children. Or selling the family sedan to buy a luxury mega-sized SUV because “the children need a safe car.”)
Some families find it helpful to have different parties as trustee versus guardian. This “checks and balances” provides some oversight, but also assists a family in permitting one person (the trustee) to make the difficult decisions (i.e., to say “no”) while permitting a different one (the guardian) to raise and nurture the child.
Health Care Powers of Attorney
If selecting your children’s guardian is the most important selection you will make through this process, your health-care agents are a close second. Here, more than ever, your health-care agent isn’t necessarily the person “who loves you the most.”
Consider: (1) Will the health-care agent (the “Agent”) have the fortitude to make a difficult decision regarding end-of-life care; (2) is the Agent someone with whom you are comfortable having this conversation during your lifetime, so they understand your exact wishes; (3) will your Agent be someone who has enough “book smarts” or “common sense” to understand complex issues being presented by your doctors; (4) can your Agent discharge good judgment while under enormous stress and in a time of grief and mourning; (5) all things being equal, do you have an Agent in mind who lives locally, and has a better chance of being physically present when an important decision has to be made; (6) consider the burden that will be placed on the Agent, and whether they will be emotionally able to “shoulder” that difficult choice (or will they be grief-stricken over having had to make a difficult decision to end life-supporting measures?); and, (7) consider broader family dynamics: if you expect that some family members may vocally disagree with your instructions and your Agent’s decision to carry those out, is it fair to put your particular Agent in that situation (for instance, if selecting a spouse, consider that spouse’s relationship with your parents – their in-laws – and whether you want your spouse to be the one presenting difficult information and decisions to other family members?).
There are myriad factors that go into your selection of your agents (as the length of this blog post indicates), and we hope this discussion reveals why your initial consultation may be relatively painless, but might not be “fast.” The best-written estate-plan is only as good as the fiduciaries you select to implement it, and a meaningful consultation with an estate-planning professional can help guide you through this decision-making process.