How to select a fiduciary

One of the most important decisions you can make when completing your estate plan is naming the fiduciary or fiduciaries who will execute your wishes and manage your assets after death, or when you are no longer willing or able to handle your financial affairs.

A fiduciary is a person or institution appointed to manage assets for the benefit of someone else. Two of the most common fiduciaries for a typical estate plan are the personal representative, who handles assets that pass under a last will and testament, and a trustee, who handles the assets that have been placed in a trust.

Choosing the right individuals or institutions for these roles can be very challenging. But an informed and educated decision can ensure a smooth transition during a difficult time. While most anyone can be named as a fiduciary, it is important to understand what it means to serve in one of these roles and ensure that you choose someone with the necessary skills and expertise.

It is hard work to be a fiduciary

Many believe handling an estate or trust is a simple process that anyone can easily manage. People often underestimate both the amount of work and the expertise needed to carry out the required duties – in addition to the time commitment. There are a variety of laws (which will vary from state to state) that must be properly navigated, including, but not limited to, complicated probate and trust laws, the Principal and Income Act, and the Prudent Investor Act.

Accounting for estates and trusts can be extremely technical and requires excellent record-keeping skills. Fiduciaries must be able to demonstrate through proper accounting that they have managed the estate or trust in an accurate, fair and unbiased manner. If an individual lacks these skills and makes a mistake, they are at risk for personal liability.

Tax knowledge may also be required to ensure that the estate or trust is run in a tax-efficient manner.  Additionally, a fiduciary must understand how their decisions will impact the estate or trust and the beneficiaries from a tax perspective. This includes how assets are invested and distributed and understanding that trusts are subject to very different tax rates and laws than individuals or corporations. The individual fiduciary will likely need to hire tax experts to avoid making a mistake, while many institutions have tax experts on staff.

The professional fiduciary is used to handling every element of trust and estate administration on a daily basis and is well-equipped to handle complicated, unique or challenging situations that your average individual fiduciary will need to seek help and guidance to navigate.

Ask questions

While working through your decision, consider interviewing the individual or institution you want to appoint. A few important questions for an institution include the following:

1. Do they have the experience and/or expertise required for your trust or estate? (Note: most institutions will review your documents and provide feedback – take advantage of this)
2. How do they interact with and engage the beneficiaries?
3. If you are considering both an individual and an institution, how does the institution work with the individual fiduciary?
4. How do they manage the assets, especially any unique assets that may be part of your trust or estate?

For the individual, you may want to ask:

1. Do you understand what it means to manage a trust or estate?
2. Are you comfortable managing the technical aspects of the trust, including reporting, taxes, and other legal elements?
3. How would they handle family dynamics and the interests of the beneficiaries?

Balancing family dynamics

We all want to assume that family members and friends will work together to administer the trust or estate. This is why many choose friends and family to serve in these roles. Unfortunately, this isn’t always the case. Appointing family or friends can lead to tension or distress that did not exist prior to the appointment. And, in some cases, can easily end up resulting in significant stress, damaged relations or even legal action.

A professional fiduciary can help ensure the client’s wishes are carried out in an impartial manner. Unlike loved ones, independent professionals can separate themselves and implement the client’s wishes without the risk of damaging relationships.

Also, if there are issues with the administration, it can be less traumatic to take legal action against an institution than a family member or friend.  Also, if a mistake is made, the trust or estate is more likely to be made whole if an institution is at fault than if you have an individual fiduciary.

Everyone can benefit from a professional fiduciary

Many believe that professional fiduciaries are only needed by those with substantial wealth. However, choosing a professional fiduciary can be a cost-effective option for more than the high-net-worth individual. It is often assumed that it’s more expensive to hire a professional fiduciary than to appoint an individual.  However, unless the individual you appoint has special expertise, they will likely need to seek advice and counsel from many different experts. It can get very expensive to hire investment advisors, tax experts, legal support, etc.  In many cases, a professional fiduciary’s fees will be the less expensive option.

At the end of the day, you should research your options to determine the appropriate kind of fiduciary for your situation. Designating the right fiduciary to manage your trust or estate can be one of the best gifts you can leave to your family.

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