Financial planning for the most part can be self-administered. But there are times that others will be turned to for help. Attorneys, accountants, financial planners, trustees, guardians and executors are all examples of people an individual may use at some point in time for help in various aspects of financial planning.
Most individuals have a relatively clear understanding of the kind of help they can receive from an accountant, attorney or financial planner. Less clear in many people’s minds, however, are the roles of the trustee, guardian and executor. Yet these three positions play an extremely important role in most individuals’ lives with respect to their estate planning needs.
The objective of this article is to provide you with an understanding of the duties and responsibilities connected with each of these three positions and give you some criteria to use when considering the selection of an individual or an institution to fulfill one or all of these roles.
An executor is the person and/or institution named in a valid will to serve as the representative of the decedent when his will is being probated. It is the executor’s responsibility to carry out the provisions of the will and settle the estate. Executors also are named to take care of any unforeseen contingencies. When death occurs, the executor must locate and probate the will. The executor must also collect the decedent’s property, pay debts, taxes, expenses and distribute any remaining assets to the beneficiaries specified in the decedent’s will. The executor’s responsibilities could last anywhere from a few months to a period of years, depending on the complexity of the estate. Table 1 provides a fairly detailed description of the duties and responsibilities of an executor for your use and review.
Table 1. The Duties of an Executor
Collects assets and information:
- Locates will and files it in court.
- Locates the safe deposit box and goes over contents with a state tax official.
- Obtains a death certificate (sometimes birth and marriage certificates, too).
- Obtain life insurance claim forms, files claims and sees that beneficiaries are paid.
- Obtains doctor’s supporting statement for insurance claim.
- Applies for death benefits from Social Security, Veteran’s Administration, employer pensions.
- Opens new bank accounts for the estate to receive income from the estate’s assets.
- Locate names and addresses of all heirs, legatees, next of kin.
- Assembles deeds, abstracts, lease contracts and insurance policies for each parcel of real estate.
- Investigates status of any business interest owned.
- Locates and inventories automobiles, furniture, jewelry, other possessions.
- Collects securities and other assets.
Determines debts and claims against the estate:
- Determines current bills owed doctor, hospital, rent, etc., and pays them.
- Determines what debts exist: mortgage, bank loans, automobile loans.
- Publishes legal notice about claims against the estate in the newspaper.
- Examines the demands of creditors and pays valid claims, opposes invalid claims.
- Obtains vouchers for every bill and claim paid, keeps records of all items.
Manages the estate:
- Sets up bookkeeping records for the estate.
- Transfers ownership on stocks and bonds, collects dividends and interest.
- Inventories all assets and arranges for their appraisal.
- Examines all real estate as to condition, adequacy of insurance and status of taxes and assessments.
- Collects receipts and manages money in the estate in accordance with the will until it is time for final distribution.
- Reviews all investments and makes necessary changes to protect value.
- Examines books and records of any business interest and has necessary audits and appraisals made.
- Supervises the family-owned business.
- Reviews the immediate needs of the survivors and arranges for living expenses.
Determines and pays all taxes:
- Computes value of the estate for state and federal tax purposes and prepares preliminary tax notices required by law.
- Selects valuation date for federal estate tax.
- Determines whether the administrative expenses should be charged against income taxes or estate taxes.
- Prepares estate income tax return and last income tax return of decedent.
- Determines charitable, marital and other deductions.
- Determines which funds will be used to pay taxes.
- Prepares and files state death tax and federal estate tax returns; pays personal property and real estate taxes.
Distributes the estate:
- Determines who is entitled to share in the estate.
- Sells assets to raise cash for specific legacies.
- Determines how assets will be distributed and which person is to get which item of property.
- Pays all final costs.
- Arranges for the transfer and reregistration of securities into the new owner’s name.
- Prepares all the information needed for the final accounting to the court.
- Obtains receipts from all beneficiaries.
- Provides all beneficiaries with the cost basis of the property which they inherited.
Many wills name a spouse or member of the family as the executor. However, many times the executor will consult with an attorney or other professionals to assist in the legal and accounting matters of settling an estate. These matters would typically include the substantial number of legal documents that must be filed and notices that must be published, along with tax returns that must be prepared for the estate. It may also be necessary to perform property appraisals and other significant amounts of accounting.
You may wish to consider naming a corporate entity as either executor or as an alternate executor because of the complexity, and to provide for the contingency that an executor named in your will may be incapable or unwilling to serve at the time required.
Selecting an Executor: Things to Consider
There are many attributes to consider when looking for an executor. These include:
- Competence and ability to serve;
- Sensitivity to the family’s situation and an understanding of the needs and circumstances of the beneficiaries;
- Knowledge of the decedent’s situation and the nature and value of the assets of the decedent;
- Integrity, loyalty and preferably the lack of any conflict of interest;
- Geographic proximity to the estate’s beneficiaries and the estate’s assets—often useful, although it should not be considered a requirement;
- A good knowledge of business and investments, and some experience in the administration of estates is also preferable.
Although all of these criteria are extremely important when considering the selection of your executor, it is my personal belief that sensitivity to the family situation is the most important. An executor can easily“hire” many of the other attributes by securing a competent adviser on these matters. However, the intangible attribute of caring about the people involved, which is critical to the performance of the executor’s duties, is difficult to measure and, thus, it is important to give careful consideration to an individual whom you feel has this sensitivity and can fulfill this role. Besides individual financial needs, there is the psychological and emotional support needed by the beneficiaries, and an executor can play a major role in this area.
The trustee is the person and/or institution who handles the administration of a trust. The trustee is named in a trust agreement and is assigned the responsibility of following the terms of the trust and carrying out its objectives.
In reviewing the duties and listing the attributes of a good trustee, it is important to remember and consider the typical objectives that a trust is designed to accomplish. Generally speaking, the goals of a trust usually include one or more of the following:
- To reduce and/or eliminate income or estate taxes;
- To reduce or eliminate probate costs;
- To provide a vehicle to receive probate and non-probate assets and foster unified administration of the estate;
- To provide for minor children according to the desire of the grantors;
- To provide for other beneficiaries who may lack the technical skills, physical capacity or intellectual maturity to handle their own affairs.
- To postpone the transfer of full ownership of assets to heirs until the age has been reached at which the grantor feels the heirs can fully handle, in a mature way, their bequest.
You can see from this list that the goals of trusts are widely varied, and it is not surprising that the duties of a trustee are many, since they include the satisfaction of a number of tax and non-tax objectives. These duties may include investment management, management of personal affairs, protection of trust assets and compliance with the intentions of the grantor. Table 2 highlights in detail many of the duties of a trustee.
Table 2. Duties of the Trustee
The trustee accepts trusteeship and assumes control of trust assets:
- Gets acquainted with the beneficiaries.
- Becomes aware of special requirements of beneficiaries.
- Notes special provisions in the trust.
- Analyzes trust assets to determine if any special protection is needed or special problems are involved.
The trustee performs initial administrative functions:
- If trust is created under a will, reviews the estate.
- Has assets titled in the trustee’s name.
- Obtains tax identification number from the IRS.
- Opens a bank account for the trust.
- Reviews all leases and contracts pertaining to trust assets.
- Makes a complete inventory of trust assets and establishes the income tax basis and holding period of each asset.
- Sets up books of account for the trust.
- Arranges for bond (usually only individual trustees).
- Places trust assets under constant supervision.
- Arranges for court formalities through the trust’s attorney.
The trustee must adhere strictly to the code of trust ethics:
- Must be active and not supine.
- Must be diligent and skillful.
- Must not leave matters to a co-trustee.
- Must be confidential on all trust matters.
- Must seek legal and professional advice as needed.
- Must be guided by good faith and fair play.
- Must be alert to all danger signals.
- Must prevent all wrongdoing.
- Must supervise persons involved with trust.
- Must guard against undue influence.
- Must disclose all information to beneficiaries.
- Must not delegate authority.
The trustee has important investment duties:
- Studies investment powers in the trust for directions or restrictions.
- Adopts an investment policy for the trust that complies with the directions given and the needs of the beneficiaries.
- Maintains complete, accurate and detailed records of all income, expenses, purchases, sales and other transactions.
- Maintains investment balance that meets the income beneficiary’s needs but produces as much growth as possible for the remaining beneficiaries.
- Avoids any act of self-dealing or conflict of interest.
- Exercises a high degree of diligence in carrying out the terms of the trust and keeping funds skillfully invested.
- Maintains close supervision over any real estate or business interest and follows the management and finances.
- Maintains proper and adequate insurance on trust assets.
Many powers that a trustee may exercise are given under state law. The grantor can limit these powers or grant additional powers in the trust agreement or will. Broad and liberal powers increase the trustee’s responsibilities, but are also important to the successful administration of the trust, such as:
- The power to retain property that is left in trust so that the trustee will not be forced to sell it for legal reasons.
- The power to vote stocks and broad powers over any business interest or real estate in trust.
- The power to hold stocks and securities in nominee name in order to simplify sales and facilitate prompt transactions.
- Broad investment powers that give the trustee flexibility in coping with changes in the investment climate.
- The power to determine what is income and principal—exercised with good judgment and fairness by the trustee.
- Power that may be given to allocate (or sprinkle) income between or among certain beneficiaries.
- Broad power to sell or exchange trust assets, including real estate or business interest held in trust.
- Power to allocate assets to various shares of trusts on a pro rata or non-pro rata basis.
- Power to set up reserves for repairs, maintenance and replacement of certain trust assets.
- Power, where possible under state law, to avoid having the trust administered under court jurisdiction.
- Power to compromise or settle claims for or against the estate rather than be forced to litigate.
- Power to borrow money—often essential to avoid unnecessary or forced sale of trust assets.
The trustee has financial duties to beneficiaries:
- Assists the beneficiaries with planning expenditures.
- Distributes income to the beneficiaries with regularity.
- As a convenience, deposits funds in beneficiaries’ accounts.
- When provided by the trust instrument, applies funds for the beneficiaries’ use when incapacitated, in ill health or advanced in years.
- Remains strongly confidential in respect to trust affairs, and loyal and impartial to the beneficiaries.
- Provides funds for the support, education and health needs of minor beneficiaries.
- When provided by the trust instrument, exercises discretionary power to pay principal to beneficiary if funds are needed.
The trustee is responsible for matters of taxation:
- Determines whether the trust should adopt the calendar-year or a fiscal-year accounting period.
- Files tax returns for trust and maintains detailed records.
- Protests improper tax assessments.
- Times sales and purchases of investments to minimize taxes.
- Supplies tax information to beneficiaries.
The trustee distributes the trust assets when the trust terminates:
- Makes partial distributions as required by the trust agreement.
- Makes final distribution of all trust assets as required by the trust agreement.
- Receives releases from beneficiaries and the court when the trust terminates and all assets are distributed.
A trustee’s responsibilities can last for a very long time, and many times will last beyond one or two generations. The selection of a trustee can also be complicated by a number of personal, family, business, investment and other non-tax considerations which must be weighed at the time a trust is created. Many times, you will find a compromise must be made between tax saving objectives and family sensitivity and flexibility when selecting a trustee.
What to Look for in a Trustee
Some of the major attributes to consider when selecting a trustee are:
- Lack of a conflict of interest;
- Knowledge and sophistication with respect to investments, general business decisions, accounting, tax planning, recordkeeping and reporting;
- Sensitivity to beneficiaries and their circumstances;
- Decision-making abilities;
- Competence and integrity;
- Flexibility to meet changing circumstances;
- Willingness to serve throughout the term of the trust.
Again, while there are a number of considerations in selecting a trustee, I feel the trustee’s ability to successfully invest and manage the assets of the trust is one of the most important attributes. The handling of the assets of the trust will directly relate to the true benefits achieved by the beneficiaries of the trust.
A guardian is the individual who will be responsible for your children or other dependents should anything happen to you. The appointment of a guardian is a decision that can have a far-reaching effect on your children or handicapped individuals or other dependents who currently rely on you for financial and psychological support. You are entrusting the guardian with the responsibility for your dependent’s mental and emotional maturity as well as the management of that person’s physical needs.
The selection of a guardian is probably one of the most difficult decisions you will ever face. As you go through life, you establish certain goals and objectives, and you will hopefully find others with similar goals and objectives. These people may be close family members or very close friends. It is important to give careful consideration to the guardian selection and to choose individuals who have objectives similar to yours. This will allow for easier implementation of the lifetime teachings a guardian needs to convey to the individuals for whom they have responsibility. As you can see, you would obviously wish to discuss the naming of a guardian with those individuals prior to naming them in any legal document.
Although this is a difficult decision, it is important to give careful consideration and definitely make a choice of a guardian for a proper estate plan. If both parents die without having legally appointed a guardian for the surviving minor children and/or other dependents, the courts must appoint a guardian—without the benefit of knowing the parents’ desires and preferences. Simply pondering the reality of this situation should motivate one enough to give careful consideration and select a guardian.
Considerations in Selecting a Guardian
There are many factors concerning guardianship that should be considered before selecting and designating a guardian in your will. Some of these factors are:
- Age of the guardian;
- Religious beliefs and practices;
- Child-rearing and social attitudes;
- Relative income and social level;
- The guardian’s own family size and situation;
- Location and residence of guardian;
- Family relationships;
- The anticipated attitude of your children.
It should be noted that if your assets, life insurance and other benefits will provide sufficient income and capital for your child’s welfare and education, your choice of guardian need not be based on monetary considerations.
I cannot stress enough the importance of naming a proper guardian. To do so will ensure, to a certain extent, that your child receives the warmth, discipline, customs and traditions that you would like them to receive.
The executor, trustee and guardian are all critical elements in most estate plans, as they are the three living entities that often breathe life into the estate planning you have done.
Careful selection here can oftentimes make a difference and result in a smooth and comfortable estate settlement and transition for your heirs.
This article was written by Michael Leonetti, CFP, for the March 1990 issue of the AAII Journal. At the time, he was president of Leonetti & Associates, a fee-for-service financial planning firm based in Buffalo Grove, Illinois. He founded Leonetti & Associates in 1982.