You’ve spent your life accumulating wealth, and you want to be sure those assets are distributed according to your instructions after you’re gone. That’s why you have a will and perhaps one or more trusts. But misinterpretations or a failure on the part of an executor or trustee to perform his or her duties can mean your wishes aren’t carried out, perhaps leaving your heirs with less of an inheritance than you had intended.
An executor handles the often complex disbursement of assets that go through the probate process, which transfers title from you to the beneficiaries named in your will. So you’ll want not only an executor you can trust but also one who can follow the required steps, meet deadlines and deal with paperwork. If some of your assets are held in trust, you’ll need a successor trustee as well, to oversee the trusts and distribute those assets.
Who should it be?
You have numerous options in naming an executor and successor trustee. This can be one or more individuals; you may prefer to stay in the family, or you can select a trusted advisor, such as a lawyer or CPA. A corporate trustee can also serve in this role. You can also name individuals and a corporate fiduciary to carry out the duties of executor and successor trustee jointly. Another option is for individual executors to hire a corporate fiduciary—an institution to act on their behalf—to help them with aspects of the job they can’t or possibly wouldn’t want to perform on their own.
For some people, the choice is simple: family. In families with complicated dynamics, however, naming one child as executor can resurrect intense sibling rivalries or lead to hurt feelings that can escalate into lawsuits. The daughter you appoint as your executor and trustee, for example, will have to oversee your investments and manage property, or even the family business, until they can be sold and the assets disbursed. “If those investments lose money, disgruntled siblings have been known to sue the executor sibling for fiduciary mismanagement,” says Raymond Seiler, senior vice president with the Wealth Structuring Group at Bank of America Merrill Lynch. Or if you’ve decided that children aren’t to receive funds from a trust until they are much older, then other family members will have to turn them away empty-handed—which can result in family conflict.
Some parents try to avoid creating turbulence by appointing all their children as executors. “But that can set up a situation where no one is in charge, or where one child resents the others because he feels he’s doing more work,” Seiler says. “It can be very difficult for co-executors to deliver on what can be a huge job.” In general, if your intention is to choose an executor from among family members, it may be a good idea to start these discussions early. This will not only help ensure that everybody is on board with the idea but will also identify potential areas of dispute early on. It can also help prepare the chosen family member or members to tackle these responsibilities during what’s bound to be an emotionally challenging time.
The institutional approach
Appointing an impartial institutional fiduciary as an executor/trustee can help avoid many interpersonal dramas and conflicts of interest. Whereas individual executors may feel free to interpret your wishes, “an unbiased third party may do a better job of following a will or trust to the letter,” Seiler says. “If there are aspects that are vague or potentially contentious, a corporate fiduciary has the expertise to administer them in a way consistent with the law.”
What’s more, an institution can sometimes serve as an emotional buffer between family members. “It’s not uncommon for relatives to claim they are entitled to certain assets or to ask for a loan against a future inheritance from a trust,” Seiler says. “A corporate fiduciary has no trouble saying no to spurious requests.” Similarly, when inventorying the estate’s assets, an institution can collect loans or property owed to the deceased by friends more easily than a family member can.
An executor also has to deal with complicated, shifting tax rules. The executor/trustee is in charge of inventorying and valuing all the assets—securities, closely held business interests, art, real estate and life insurance policies—at the time of death and can do so again six months later based on current tax law. “If the second valuation is lower than the first, you’d use that one to potentially pay less tax,” Seiler says. “But the IRS often challenges valuations, and if you do it incorrectly, you can find yourself in an estate audit with the IRS.” A corporate fiduciary has the resources and experience to bring in the proper professionals to value assets in accordance with the current tax code. An institution can also serve as successor trustee for assets that will stay in trust for decades after you pass away, whereas an individual trustee may not outlive the trusts.
Avoiding potential pitfalls
Keeping track of deadlines and the myriad steps involved in settling an estate is also part of the job of executor. One potential misstep is to forget to transfer the deceased’s unused federal estate tax exclusion—each person can currently pass $5.12 million to beneficiaries free from estate taxes this year—to his spouse so that she can make gifts or transfer $10.24 million free from taxes to heirs when she dies. “If you don’t file an estate tax return, even if no tax is due, the surviving spouse can potentially lose the ability to use their spouse’s estate tax exclusion,” Seiler says. The use of this portability may not be available after 2012 unless the law is extended, and current gift and estate exclusions expire at the end of 2012.
“The complexity of changing tax laws and increased scrutiny by the IRS make being an executor and trustee very challenging for a family, especially when the children might be worrying about the other parent,” Seiler adds. The time needed to settle a parent’s estate may be overwhelming. “After the death of a parent, the family is dealing with matters that are more important to them than the minutiae of inventorying assets and valuing them,” he says.
Deciding on an executor—whether a family member, a corporate fiduciary or some combination of options—can be a difficult and personal decision, but it’s also one that is best made with full awareness of all the responsibilities it entails. “Under the best of circumstances, settling an estate can be challenging. In the worst cases, it can be a litigious mess,” says Seiler. “It can be very comforting knowing that whoever is doing it is able to handle all the details and follow all the rules.”
Consider asking your Financial Advisor the following questions to help you in making your decision about appointing an executor and/or a trustee:
- Given my current plans, could administering my estate be complex?
- Is there any way to take care of some of the inventory needs of my estate now rather than later?
- Given the way my trusts are set up, does my trustee need to be familiar with tax law or other laws?
- What are the time horizons on my trusts as they’re currently structured?
Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither Merrill Lynch nor its financial advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.