While the term fiduciary is a legal term with a rich history, it generally means someone legally obligated to act in another person’s best interest. Trustees, executors, and agents are examples of fiduciaries. When you pick a person to fill these fiduciary roles in your estate plan, you pick one or more people to make decisions in the best interests of you and your beneficiaries, per the instructions you leave. You should also choose multiple backups for each of these roles in case your first choice is unable or unwilling to act when the time comes. Knowing how to pick a fiduciary is crucial in these circumstances.
Understanding the basics of what each role entails and what to consider when making your choices can help ensure that your estate plan is effective. Learning how to pick a fiduciary is a good starting point.
A revocable living trust is often the center of a well-designed estate plan because it is the best strategy for achieving most people’s goals. You (as the trustmaker) will usually serve as the initial trustee and continue to manage the trust’s accounts and property in the same manner you did before the trust was created. You will appoint a successor (backup) trustee in the trust agreement to ensure that your wealth is managed following your wishes after your death or during your incapacity (when you can no longer manage your affairs). Having a trusted person or financial institution carry out this vital role is best.
Your successor trustee will control only the accounts and property the trust owns. If you own accounts and property in your sole name—that is, not as the trustee of your trust—your successor trustee will be unable to manage those items upon your death or incapacity. You will have to rely on your financial power of attorney to give someone the authority to manage those accounts and property while incapacitated.
When you pass away, accounts and property in your sole name without a beneficiary designation may have to go through the probate process. Probate requires your executor to step in and manage those items and ultimately distribute them to the people who have priority under state law (who may not be the people you would have chosen). This is why it is of the utmost importance to appoint the right person to be your successor trustee and fully fund your living trust.
Powers of attorney are the documents in your estate plan that appoint individuals to make decisions on your behalf if you are alive but unable to do so yourself. There are a few different types of powers of attorney, each with specific areas of responsibility. We can help you decide which types of powers of attorney you need based on your current situation and future goals. Here are two common types to include in your estate plan:
Financial powers of attorney grant the fiduciary you select the ability to take financial actions on your behalf, such as purchasing life insurance or withdrawing money from your bank accounts to cover your expenses. A fiduciary who acts under the authority given in a financial power of attorney is generally called an agent. Your agent is only able to manage the accounts and property that are not owned by your trust. If the trust owns an account or property, it is the trustee’s responsibility to manage that item, as discussed above. You can name an individual as your agent, or, in some circumstances, you can name an institution, like a trust company. While in most states, your agent is permitted to charge a fee for acting as your agent under a financial power of attorney, remember that trust companies generally charge higher fees and will likely not waive fees like your loved ones might. Knowing how to pick a fiduciary for this role is key.
A healthcare power of attorney allows you to name a trusted person to make or communicate your medical decisions on your behalf when you cannot do so yourself. These decisions may range from deciding what surgeon to use to whether to remove you from life support. Other documents can be used with the healthcare power of attorney to cover specific actions that can be taken regarding your medical needs, such as making decisions about the types of care you wish to receive or who can access your medical information.
Your executor (called a personal representative in some states) is the person who will see your accounts and property through probate, if necessary, and carry out your wishes based on your last will and testament if you have one. Your executor may be the same person or institution as your successor trustee, depending on your preferences.
Some individuals choose to name a professional as their executor. The professional usually does not stand to gain anything from the will, and this can be a good choice if you own many different properties and accounts to be divided among many beneficiaries. In other words, the more complex your estate and distribution scheme, the more it may make sense to have a professional in charge. A professional may also make sense if you do not have someone you know who can serve as the executor. Family or friends may serve, but it is essential to consider the amount of work involved before placing this burden on someone who has little time or experience administering the estate of someone after they pass away.
Being an executor can be hard work and may have court-dictated deadlines; picking someone you know will be up to the job is crucial. They will probably need to hire an accountant to help sort out your taxes and a lawyer to assist in the process. If there is a dispute, attorneys, appraisers, mediators, or other professionals will undoubtedly need to be involved. Choosing a spouse or another loved one to serve as your executor may be convenient because they may already be familiar with what you own and have an easier time ensuring that your wishes are carried out. However, they may not be up to the task because of the time involved and the nature of some accounts and property. Understanding how to pick a fiduciary for these roles is challenging, but essential to an effective estate plan.
Let us help you pick your trustee, agents under powers of attorney, and executor as smoothly and headache-free as possible. Once you have these choices, you can rest easy knowing that your estate plan is in good hands no matter what life brings. Book a FREE Discovery Call and learn how to pick a fiduciary effectively.
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