The probate process is the legal process that occurs after someone passes away. Probate is…
Have you picked the right person as your executor or trustee?
Before you name someone as an executor or a trustee in your will – or before you agree to be an executor or a trustee – it’s a good idea to review exactly what responsibilities are involved.
These are serious jobs, and sometimes people don’t give enough thought to which person should be chosen.
Often, people simply name a spouse, a child, or a family friend. This might seem like a logical choice, and the person might expect to be given such a role, but that doesn’t mean they’re necessarily the best person for the job – particularly if they’re not detail-oriented, good with figures, and adept at handling money. Many people who quickly agree to act in these roles later come to regret it.
An executor’s job typically lasts about a year, and involves a lot of responsibility. Most executors hire an attorney and sometimes other professionals to help them through the steps and make sure they don’t make any mistakes. However, you’ll still want to pick someone who is willing and responsible enough to handle the often difficult and time-consuming tasks.
These tasks typically include:
- Locating the deceased person’s will (the original, not a copy) and filing it for probate.
- Obtaining a death certificate, obtaining an estate tax ID number from the IRS, and setting up an estate bank account.
- Notifying beneficiaries and other potential heirs.
- Placing an ad in a newspaper to provide information to potential creditors.
- Making a list of all the estate’s assets and liabilities, collecting assets (which may be in other people’s hands), liquidating bank and other accounts, and protecting all assets from loss or harm.
- Obtaining appraisals to determine the value of the property.
- If the property includes a business, making sure the business continues to run successfully.
- Paying valid claims from creditors. If nothing else, it will be necessary to pay funeral expenses, probate fees, professional fees and taxes out of the estates funds.
- Filing tax returns on time, including any income tax and estate tax returns.
- Distributing property to heirs. This can include selling property to fund a bequest. It can also include setting up trusts as indicated in the will.
- Keeping detailed records of all expenses, and filing an accounting with a court.
An executor is entitled to be reimbursed for reasonable expenses, and in some cases can receive compensation.
The job of a trustee can be even more important, because it doesn’t end when the estate is closed – it continues for the life of the trust.
A trustee is responsible for managing the assets of a trust for the benefit of the beneficiaries, while acting in accordance with the trust’s terms. If a trustee makes a mistake and a beneficiary loses money as a result, the trustee could potentially be legally responsible – which is one reason why being a trustee is such a serious job.
Here are some of the issues that trustees can run into:
- Trustees are usually required to keep detailed records of assets, income and distributions. Further, they often have to provide copies of these records at regular intervals to all beneficiaries – including people who may become beneficiaries only years later. This is a big job.
- Trustees have a duty to use good judgment in managing the assets. That includes understanding and using basic investment principles such as diversification of assets. This can be an issue, for instance, if a trust is funded with stock in a family-run company. While everyone might want the trustee to keep the stock, the trustee might have a legal duty to sell some of it to reduce the risk of having the trust assets heavily concentrated in a single investment.
- Trustees have a fiduciary duty, which means they must always act in the best interest of the beneficiaries – and never in their own interest.
- Trustees sometimes have to manage conflicting expectations. For instance, suppose a trust provides income to a second spouse during the spouse’s lifetime, after which the trust assets go to the children from a first marriage. The second spouse might pressure the trustee to invest so as to maximize current income, while the children might want the trust invested for long-term capital gains. A trustee typically has to be fair to all beneficiaries while acting within the terms of the trust – which might not make him or her the most popular person in the family.
- Trustees may be entitled to compensation, but it’s very important to make clear upfront how that compensation will be calculated in order to avoid future conflicts. Will the trustee be paid annually? Will he or she receive a set fee, or a percentage of the trust assets? Will this change over time?
Executors and trustees have important jobs, and in many ways they’re the linchpin of a successful estate plan. It’s worth thinking carefully about the people you choose in order to make sure they really are, or still are, the best person for the job.