From the Estate Planning, Probate & Trusts Practice.
Your ability to select the person to manage your affairs after your death is one of the advantages of making a will or a trust. If you make a will, or a revocable trust as a substitute for a will, you nominate a person to settle your estate. If you create a trust, you name a person to be the “trustee” of the trust. The trustee is duty bound to follow the instructions in the trust instrument and the law governing trusts.
The person whom you nominate to settle you estate is your “personal representative,” sometimes called your “executor”. Both your personal representative and your trustee are “fiduciaries”.
This article contains information and answers to common questions concerning the selection of fiduciaries. It is up to you to judge whether the fiduciaries you select will be up to the tasks which you have asked them to undertake.
Which Of My Estate Planning Documents Call For Me To Nominate A Fiduciary?
Your “last will and testament” always names one or more persons to be your personal representative. If you are using a “revocable trust” as a substitute for a will, that trust names a trustee to settle your affairs. The trustee of a revocable trust acts a lot like a personal representative until your estate is settled.
Some wills contain “testamentary trusts” to be funded after your death. Such wills name one or more trustees in addition to a personal representative. The personal representative and the trustee named in such wills are sometimes the same person. In the case of a revocable trust containing a testamentary trust, the trustee continues on as the trustee of the trust after your affairs are settled and the trusts are funded.
Your estate plan may include a trust, such as an Irrevocable Life Insurance Trust, which you created to take effect immediately. Those trusts (technically known as “inter vivos trusts”) are established when you fund the trust and you and the trustee sign a trust agreement which explains the purpose of the trust, names the beneficiaries, gives the trustee certain powers to administer the trust, and contains your specific instructions to the trustee concerning how you want the trust funds to be paid out.
How Long Do My Personal Representative And My Trustee Serve?
Your personal representative takes over the administration of your estate as soon as the probate court appoints him, usually on the same day your will is filed for probate. The personal representative serves until discharged by the probate court, usually only after all inheritance taxes are paid and the distribution of your estate is accomplished to the satisfaction of the court.
Your trustee under a testamentary trust takes over from the personal representative as soon as your estate is settled and the personal representative transfers funds to the trust. Frequently, the personal representative is discharged at about the same time. Your trustee under an inter vivos trust assumes control of the trust as soon as you transfer funds to the trust. The trustee continues to act until the purposes of the trust have been accomplished, or the trustee resigns or is removed in which event a substitute or a successor trustee is named.
Are There Any Legal Limitations On My Selection Of A Fiduciary?
The probate courts in Maryland will not appoint an individual personal representative who is under the age of 18 years, or is mentally incompetent, or has been convicted of a serious crime. A non-U.S. citizen is disqualified unless the individual is your spouse, ancestor, descendant, or sibling and is a permanent resident of the United States. The courts insist that a nonresident personal representative appoint an appropriate Maryland resident to receive service of process on behalf of the nonresident.
Any trust company can act as personal representative or trustee.
In some cases, there are tax related reasons for the naming of an independent trustee to act under certain kinds of trusts. To be independent, the trustee must not be related or controlled by you, or in some cases by one or more of the beneficiaries.
What Does The Personal Representative Do?
Being a personal representative is not merely an honorary position. It is a job for a person with both financial know-how and the willingness to carry on with the administration of your estate, sometimes for a period of years.
The personal representative’s five major tasks are:
- Attending to the formalities of probating the will, obtaining a federal tax number for the estate, and hiring professional help. In Maryland, probate is a relatively simple process. The personal representative merely has to file a few papers with the Register of Wills, an administrative officer. The harder parts follow.
- Collecting assets and paying debts. This part of the job includes securing date-of-death valuations for financial assets, getting real estate and valuable personal property appraised, and dealing with creditors’ claims. If your assets include hard to value assets, such as oil and gas interests, closely held business interests, real estate, or an art collection, this process can be difficult. In Maryland, the value of the assets has to be reported to the probate court. The report is required for assets held in a revocable trust as well as for those which pass under a will. If you have real property located in several states, it may be necessary to secure the appointment of ancillary administrators in those states to deal with that property.
- Managing assets, including opening separate bank and brokerage accounts for the estate, collecting life insurance and retirement benefits, retitling property, arranging for the safekeeping of personal assets, insuring the property in the hands of the estate, and making management decisions. The personal representative has to act in the best interests of the beneficiaries of your estate, and not necessarily in the manner you would have acted if you were alive. The personal representative is responsible for any mistakes that reduce the beneficiaries’ shares.
- Filing tax returns and paying taxes. This includes the completion of federal and state income tax returns for you and for the estate itself; a federal or state estate tax return, or both, if your total estate is large enough to be subject to that tax; and state death tax filings.
- Closing out the estate, distributing the assets, and making a final accounting to both the beneficiaries and courts. Your estate can be distributed before the final settlement, but the personal representative has to keep enough in reserve to settle any final tax bills or other claims against the estate. The federal estate tax is particularly tricky, since the IRS has three years within which to audit the return (which must be filed within nine months after death).
Might A Fiduciary Incur Liabilities For Mismanagement?
Your fiduciaries must be loyal to the beneficiaries of your estate or trust. They must place the beneficiaries’ interests above their own. Your fiduciaries are answerable to the beneficiaries for any harm to them resulting from a breach of their fiduciary responsibility, including neglecting the administration of the estate or trust.
The fiduciary must scrupulously avoid a conflict between his duty as fiduciary and his personal interests. A fiduciary may not commingle trust funds with his own funds. Nor may a fiduciary engage in self-dealing, that is, use the trust to further his personal interests, such as using trust funds to make an investment in a business he controls for his own profit. A court could order the fiduciary to pay any self-dealing profits to the beneficiaries.
Who Will Be The Best Personal Representative?
Keep in mind that the selection of a beneficiary as your personal representative can result in a conflict of interest. Unless that person is the sole beneficiary of the estate (as a surviving spouse often is), he or she may be forced to choose between his or her interest as beneficiary and the interests of the other beneficiaries. Adding an independent third party as personal representative, either alone or in conjunction with a family member, usually solves the problem.
If you have an interest in a closely held business, the selection of a business associate may also result in a conflict of interest. The associate may be torn between selling the business (which the beneficiaries might want) and keeping the business as a going operation (which he might want). If the business is to be sold, the business associate will be obligated to obtain the best price for the sake of the beneficiaries. However, the business associate may also be eager to buy the business, in which case he will be seeking the lowest possible price.
The personal representative should know and get along well with the family members he will be working for after you are gone. It will be essential that the personal representative be a person who is able to communicate freely and openly with the beneficiaries.
If your estate is not extensive or if all of your assets consist mainly of marketable securities and your residence, the surviving spouse or a reliable family member may be the best choice if that individual is up to the job. But, if your estate contains closely held business interests, commercial or rental real estate, limited partnerships, and the like, you need to select someone with business and financial savvy. One of the personal representative’s most important jobs is to obtain accurate valuations of your assets as of the date of your death. The estate tax is based on the value of the assets in the estate, and the IRS often audits the valuations reported on the estate tax return.
A corporate personal representative, such as the trust department of a bank, is a good choice if you cannot choose a family member for some reason, such as a conflict of interest, or if your estate is likely to be difficult to administer, or if you have chosen the bank to be the trustee of your testamentary trust. Many banks would rather not act as trustee if they feel that something might have been overlooked while the estate was being administered.
As noted above, there may be tax related reasons to appoint a corporate trustee or an unrelated individual as an independent trustee.
What Are The Special Duties Of My Trustee?
Some trustees are given the discretion to distribute or withhold the distribution of trust funds to a beneficiary. This discretionary power is often given to protect the trust funds from the beneficiary’s creditors, or simply to assure that the funds are available for particular purposes until the beneficiary reaches a certain age. The trustee under such a discretionary trust ought to be sympathetic to the purposes of the trust and the legitimate needs of the beneficiary.
All trustees carry a heavy fiduciary duty to the beneficiaries of the trust. They must manage the trust prudently, which means they must understand the principles of sound investment strategy. A trustee must treat all beneficiaries fairly and impartially. This is harder than it sounds. Multiple beneficiaries sometimes have different kinds of interests in the same trust, and those interests sometimes do not mesh. For example, many trusts have a beneficiary entitled to the trust’s income and a different beneficiary who receives whatever is left in the trust after the income beneficiary dies. Should the trustee invest mainly in income producing, but low growth securities to satisfy the income beneficiary’s desire for current income distributions? Or, should he invest in low income, but high growth securities to produce a larger fund for the beneficiary who will come into the balance of the fund after the income beneficiary dies?
Just as a personal representative has to account for the administration of your estate, a trustee has to make an annual accounting of the trust. A trustee who is an individual must either have strong bookkeeping skills or should hire a professional to perform that chore.
Can The Person I Nominate As My Fiduciary Refuse To Act?
The personal representative named in your will can renounce the right to act by filing a written declaration with the probate court. Once appointed, a personal representative may resign. The trustee may also decline to accept the trust and, once acting, may resign as long as either the trust allows him to resign or he receives court permission to do so.
What If The Fiduciary Dies Or Refuses To Act?
The probate court will appoint a successor personal representative. In the case of a trustee who has resigned, the trust agreement will often provide for the appointment of a successor. As a last resort, a court will make the appointment.
The best protection against this event is to name an alternate personal representative and trustee in your will or inter vivos trust. The named alternate will step in quickly without the need to search for a replacement or involve the courts in the appointment of the successor.
When Should I Appoint Co-Fiduciaries?
As noted above, the appointment of co-personal representatives, at least one of whom has no interest in the estate, can solve potential conflict of interest problems. The independent trustee may be an unrelated third person, a corporate trustee, or an attorney.
An independent trustee may be required to serve for tax purposes. The independent trustee serves to insulate the beneficiaries of the trust from the taint of control of the trust. However, the independent trustee can serve as co-trustee with a beneficiary, but the decision-making powers of the beneficiary co-trustee will have to be limited.
If you are unsure whether a family member can manage the job, and you are not comfortable with placing the entire matter in the hands of an institutional fiduciary, you may want to name an individual and a bank as co-personal representatives and co-trustees. The individual adds a personal touch and has the resources of the corporate trustee as backup.
How Are My Fiduciaries Compensated?
Personal representatives are entitled to a commission based on a percentage of the assets of the estate. Unless your will states otherwise, the maximum commission allowed in Maryland is 9% of the first $20,000 plus 3.6% of the assets in excess of that amount. The personal representative may waive the commission, and he or she may use all or a portion of the commission to pay the fees of the attorney who is engaged to assist in the administration of the estate.
Institutional trustees are usually compensated according to a published schedule of fees based on a percentage of both the annual income and the value of the principal of the trust. The schedule may change from time to time.
Review And Update Of Your Choice Of Fiduciaries.
A good rule of thumb is to have your estate plan reviewed by an attorney every three to five years. An important part of your estate plan is your choice of your personal representative and trustee. Your estate planning attorney can help you and the persons you have nominated to learn about the job they have agreed to undertake.