Choosing the Right FiduciaryJuly 12, 2011
By Dianne Rizzo, EA
Manager - Trust & Estate Planning
One of the most important decisions in estate planning is determining who should act as the fiduciary, whether it is the executor of the estate or the trustee of the trust. Choosing the wrong fiduciary cannot only be disastrous for the grantor but also for the fiduciary as well.
When an individual dies, the final settlement of his affairs and the distribution of his assets are the primary responsibility of the executor. Since the executor is handling property which originally belonged to the decedent and the balance of which, after payment of debts, expenses and taxes, belongs to the heirs, he is held to a high standard of responsibility. The administration of the estates involves the collection and protection of the decedent’s assets, payment of proven debts, filing estate and income taxes, payment of administration expenses, and distribution of the remaining balance to those entitled to receive it. With this in mind, the selection of the executor should be a process for determining the person best suited to the task than the closeness of family ties.
The position of executor of an estate has both rewards and potential liabilities. Executors are entitled to compensation in the form of commissions. In Connecticut this amount is not based on a fixed percentage of the assets but on the reasonableness of the work performed. On the liability side, the executor may be held personally liable to the decedent’s creditor if estate debts are not paid and the estate beneficiaries if he mishandles the property of the estate. This should be a consideration before accepting the position of fiduciary.
Trusts are established for a variety of purposes; tax planning, asset management, and the ease of asset transfer. The selection of a trustee is impacted by the purposes of the trust. The grantor serving as trustee of a trust during his life would be suitable for managing assets in one place and transferring them without probate approval upon his death. However, it would be unsuitable for the grantor to be trustee of an irrevocable trust that can cause the assets to be includable in his estate as with a life insurance trust.
A trust is a legally binding agreement where a trustee is appointed to hold the grantor’s property in a fiduciary relationship. The relationship is held to the highest legal standard of mutual reliance and faithfulness for the benefit of the beneficiaries. It is the trustee’s responsibility to protect the assets entrusted to him as well as fulfill the wishes of the grantor regarding current and future dispositions. Often the current income beneficiary may not be the same individual who will ultimately receive the assets.
The duties of the fiduciary are guided first by the document then applicable state law and finally federal regulations. The document is the starting point for a fiduciary which specifically set forth the duties required to carry out the purpose of the trust. Certain fiduciary duties are imposed by state law, but the terms of the document always take precedence. Connecticut state law requires the fiduciary to comply with the duties of loyalty, impartiality, skill and care, segregation of assets, enforce and defend claims, and confidentiality.
The trustee of a trust is granted administrative powers to carry out his administrative duties. The trust instrument is the starting point for determining the extent of these powers. The provisions of the trust describe what investment are permissible, the trustee’s discretionary decisions and entitlement of notice to beneficiaries. In addition to the language of the trust agreement a trustee’s powers are set forth in state trust case law and statutory law. In certain instances where trustee’s powers are not clearly stated in either the agreement or state law, it is possible to petition the probate court for guidance.
The position of a trustee is not without potential liability. One of the areas where trustees are vulnerable to lawsuits is the duty to invest assets prudently. After the Uniform Prudent Investor Act of 1994, trustees were required to adopt the portfolio theory of the “Prudent Investor” standards. A trustee is judged on the risk and return objectives, general economic conditions, and expected tax consequences of the entire portfolio. The investing is a delicate balance between providing for the needs and wants of the current income beneficiary while preserving assets for the remainder beneficiaries.
Failure of the fiduciary to carry out his duty to distribute assets appropriately is another potential liability. Trust agreements often give trustees the discretion as to when and to whom distributions may be made. The various beneficiaries may not agree as to how and why these distributions were made causing the trustee the burden of defending his decisions.
Another area which may cause trouble for the trustee is at the termination of a long term trust where the principal is distributed to the remainder beneficiaries. Identifying the beneficiaries and determining their distributive share may not be easily accomplished. The question of whether to distribute the property in kind or cash can also be a problem when terminating a trust.
It is important for the trustee to know there has been a 22% increase in fiduciary litigation cases over the past decade. The areas of litigation are: (1) failure to invest prudently; (2) conflict of interest or self-dealing; (3) failure to distribute on discretionary trusts; (4) exceeding or misconstruing the trustee’s powers; (5) failure to properly delegate and oversee agents; and (6) breach of contract, liability to third parties.