Many people often choose a relative or a close friend as executor or trustee (a fiduciary) of their estate. It makes sense; you trust them now and trust their judgement when they will stand in your shoes, so to speak. However, the job can prove more difficult than either of you imagined.
A fiduciary must carry out the terms of your plan at the very time he or she is grieving, and many times (s)he is unfamiliar with the ins and outs of the job's responsibilities. He or she may not have enough financial knowledge to understand what's expected or may miss important deadlines due to a lack of understanding, often costing some serious penalties for the estate.
Person Over 'Puter
Some people may be tempted to use free or budget-priced online resources to help with executor duties. Unfortunately, inexperienced executors may unwittingly believe using these software sites are all they need in order to complete their duties adequately. Just as TurboTax does not replace the expertise of a good accountant, online executor-in-a-box tools are not a replacement for professional legal advice.
In addition, while fiduciaries are often eligible to receive reasonable compensation for the duties that are required, that payment becomes taxable income. If the executor is a family member who stands to inherit anyway, then they are sometimes better off waiving the fee and simply collecting their inheritance. If the estate is large enough to be subject to an estate tax, then the executor should definitely work with an experienced estate planning attorney and tax advisor.
Trustees - or Better Yet, a Team of Trustees
In the case of a trust, you named a trustee to manage your estate and the disbursement of the assets to beneficiaries. In some cases, you might be better served by having a team of trustees - with each one pulling from a different area of expertise or experience. If the trust is expected to last a long time or there are substantial assets, having more than one person managing things can be ideal. However, there can be downsides, too. Naming family members as co-trustees can lead to tensions, especially when children are equally named as trustees. Naming too many trustees can also cause problems if their roles are not clearly defined.
Mistakes Can Be Anticipated
We recommend that you think about these potential fiduciary issues. One of the ways that our office assists fiduciaries in understanding their responsibilities is through a Family Care Meeting. Discussing the expectations and obligations that go along with the job can be extraordinarily helpful to your fiduciaries.
Being named an executor of an estate is a big responsibility, and you need to be aware of potential pitfalls. Be straightforward and ask if they are not up to the task. It is much easier and less costly to resolve these issues at the estate planning stage rather than after the fact.
For more information, explore our website and contact us to schedule a consultation today!
Reference: The Daily Plan-It (August 2015) “Friends As Fiduciaries?”