Using A Professional Fiduciary

Estate planning is about choosing the right people to fill certain roles in your estate plan. It’s selecting decision makers and defining who they care for when you are unable to. For some, the estate plan and beneficiaries may be clear, but maybe it’s slim pickens trying to select someone to carry out the plan–the decision makers. Well, like anything else in life, you can usually find a professional to do the job. Enter: professional fiduciaries.

A fiduciary is a person who acts on behalf of another, like managing money or property. A fiduciary assumes a duty to act in good faith with care, candor, and loyalty in fulfilling their obligations. The trustee of a trust is an example of a fiduciary. The trustee is administering the terms of the trust, on behalf of the person who created the trust, for the benefit of the beneficiaries.

There are institutional fiduciaries, like a bank. And there are individual fiduciaries, who are bonded professionals in private practice. For flexibility and a personal touch, some may hire a private professional fiduciary. For long standing stability and managing large portfolios of assets, some may hire an institutional fiduciary. It depends on the circumstances and your priorities. Either way, you can meet and speak with a professional of your choice, and then nominate them in your estate planning documents.

Here are some circumstances when professional fiduciaries may be helpful.

Transplant

If you relocate to another part of the country, or to another country altogether, it may take some time to build a network of trusted friends and contacts. A professional fiduciary can help fill the role of financial decision maker when a personal contact or family member is not a practical possibility. If you end up finding someone you are more comfortable with, you can always amend your documents to update your list of decision makers. You do not need to delay creating an estate plan simply because you do not know enough people in town.

Specific Needs

If your loved ones require special attention–whether that be due to a medical condition, an addiction issue, issues related to means tested government benefits, or something entirely different–a professional fiduciary can assist navigate those delicate waters so that you do not have to place an ill equipped family member into the situation. A professional fiduciary will not be emotionally attached to your situation. They will have no problems setting boundaries with the beneficiary, or sticking to firm guidelines. It’s their job and they take it seriously. They will also ideally have familiarity and experience dealing with discrete issues with trust beneficiaries.

Multi generational

If an estate plan calls for long term care of beneficiaries–for example, a “dynasty” trust, or a trust set up for a very young beneficiary that will persist into that person’s adult life–then choosing a decision maker that can carry on their duties for decades may make a lot of sense. Institutional fiduciaries typically have the ability to outlive an individual serving that role, and can provide that continuity and consistency that may be required under the circumstances. Similarly, nominating a private professional fiduciary firm, that employs several fiduciaries, may allow for that same type of continuity over the course of years.

Your estate plan should not be dependent upon your personal network of contacts to provide you with an adequate decision maker. A professional fiduciary can fill a gap until a personal decision maker is available to you, and it can also provide you with options that a family member or close friend cannot provide.

What is... a Trustee?

This is part of an on-going series of blog posts titled the "What Is..." series, where we attempt to explain, in simple terms, common estate planning terms and concepts. To read other posts in this series, click here.

A trustee is a person (or sometimes an institution, like a bank) who has the power to act on behalf of a trust. If you establish a living trust (as a trustor), then most of the time you will be the initial trustee. You act on behalf of the trust. 

As the trustor (also known as the person who established the trust), you also name successor trustees -- people who will act on behalf of the trust after you, either because you no longer want to, or you are not able to do so, or because you have passed away. 

As the trustee of your own living trust, nothing changes on a day-to-day basis. You even file taxes the same way. The living trust is more like a legal alias for you.

But what do your successor trustees do for your trust? Or, what do YOU do if you’re named as a successor trustee for someone else? 

In sum: the trustee’s job is to carry out the directions set forth in the trust document. 

There are some initial steps that a successor trustee must take after the death of the trustor. Please note that this is not an exhaustive list -- and this is exactly what we help with as attorneys. This is for informational purposes, to give you some idea of the responsibilities involved. 

First, the trustee must accept the position so that they can act on behalf of the trust. Then:

1. In general, the trustee must notify the beneficiaries and heirs that they are beneficiaries of the trust.

2. Certain government offices must be notified as well, depending on the trustor’s assets and benefits. For example, if the trustor owned real estate, then the assessor’s office must be notified. If the trustor was receiving social security benefits or Medi-Cal benefits, those agencies would need to be notified.

3. The trustee must then inventory and determine the value of assets as of the date of the trustor’s death (e.g. appraisals of property, etc.). This is required to determine the value of the assets for tax purposes, and to provide an accounting of the trust property to the beneficiaries.

4. In addition to handling an estate tax return, the trustee may be required to file the trustor’s final income tax return for the year that they died. The trustee may also have to file an income tax return if the trust estate earns money before it is all distributed to the beneficiaries. 

The trustee must then follow the instructions in the trust, within the boundaries of the law. This may include paying funeral expenses, outstanding credit card debts, etc. Some trusts have certain time periods during which the beneficiaries should receive a distribution, or they may have conditions that must be met before a beneficiary receives a distribution. Some trusts require waiting a certain period of time before the beneficiary receives a distribution, or the trust may contain outright restrictions on distribution. The trustee is tasked with interpreting and executing all of these instructions.

The trustee has a fiduciary duty to the trust. This means that just because they have the right to do something doesn’t mean that they should do it. For example, they may have the ability to sell trust assets like a home, but if they sell it for below the market value, or in a down market, they could have breached their fiduciary duty.

It’s important to know what the trust says to be able to execute its provisions and comply with the legal requirements. 

If you are a successor trustee for a loved one, please contact us for a free initial consultation. If you have a trust, and would like to ensure that it says what you want it to say for your trustee, please also contact us for an initial consultation.

Trustees and Fees

If I ask someone to be a trustee for me, I want to make sure that they get paid. Do I need to give them a specific amount in the trust? 

Most trusts (like most of the ones we draft) include a provision that permits the trustee to receive “reasonable” compensation. In most cases, this is determined based on the amount of time and complexity of an estate. And, in most cases, there is no dispute about the trustee receiving reasonable compensation. 

However, if you anticipate that someone might challenge the compensation, then you absolutely can specify how a trustee will be compensated. For example, you might select a percentage of your assets as payment or you might select an hourly rate that increases with inflation. 

(Note: If you have a professional fiduciary serve as a successor trustee, then they will provide their own rate of pay.)

How does someone determine what is a reasonable fee?  

The trustee must keep track of all the time that he or she spends in the role of trustee. The trustee should keep a log of the date, amount of time*, and each task that was performed. More complicated tasks are entitled to increased compensation. Keeping clear records is important. 

At the end of the year, the trustee can obtain the fee. By keeping clear records, the beneficiaries understand why the trustee is requesting the amounts and what they did during that time. Additionally, if administering the trust takes multiple years, the beneficiaries are less likely to raise issues or questions if the fees are spread over several years. 

*How does a trustee track time? 

We recommend tracking time by 15 minute increments or less. In other words, if something takes you 10 minutes, then it’s okay to put in .25 as your time; it is not okay to round up to an hour. 

Is the trustee’s fee considered a gift? 

No. The trustee’s fee is taxable income. It is earned. However, if the trustee spends money that is reimbursed (e.g. mileage for trips on behalf of the trust or tolls) than this is not income and therefore not subject to income tax. 

How does the trustee pay for things? 

The trust pays for trust expenses. Depending on the terms of the trust and the point at which a trustee begins managing the trust, the trustee should create a trust administration bank account, opened using a taxpayer ID that is specifically for the trust. 

What if my trustee doesn’t want to accept a fee? 

Even if the trustee chooses to waive a fee, he or she is still entitled to receive one and should take the approach we recommend above. A trustee may begin by saying that they don’t want a fee, but if the time and complexity becomes too much, they may decide otherwise. Having clear records is the key. 

Why wouldn’t a trustee accept a fee payment? 

Trustee fees are income, and therefore subject to income tax. If the trustee is also a beneficiary of the trust, they may decide to waive the fee as they would receive funds as a trust distribution anyway. 

If I become a trustee, what’s the first thing I should do? 

We strongly recommend speaking to an attorney (like us) as early as possible. We know that grieving can take a toll, but we also are here to help guide you through the trust administration process.