CHOOSING AN EXECUTOR, AGENT AND TRUSTEE

By Kirk R. Wilson, J.D., LL.M.

One of the most difficult estate planning decisions for many clients is the selection of the people who will manage their affairs if they become incapacitated and later distribute their estates when they pass away. Picking the right people is essential to the successful implementation of one’s estate plan. For some the choice is obvious. It may be a spouse and then one or more responsible adult children. But for others, the answer is less clear cut. The individuals or institutions named to act as an agent under a durable financial power of attorney, or as a successor trustee of a living trust, are being entrusted with significant power over a client’s financial affairs if the client becomes incapacitated. An agent under a medical power of attorney is being given the legal authority to make health care decisions, including “end of life” choices (generally pursuant to a medical directive) for a client who has become incapacitated. And an executor (particularly an “independent executor” under Texas law) or a trustee of a deceased client’s trust has broad powers to administer the decedent’s estate or trust. For this reason, the law imposes a number of “fiduciary duties” on these individuals, which require them to use their powers only in the best interest of the incapacitated client or of the deceased client’s heirs and beneficiaries. These legal duties have evolved over time because so much power is placed in the hands of a “fiduciary” and because many persons entrusted with this power over the years have abused it. It is rarely an easy assignment to serve in one of these fiduciary roles. It can be very time-consuming and stressful, particularly where there are difficult decisions to be made. Fiduciaries managing assets may need to decide whether assets should be sold, how funds should be “prudently” invested, whether certain bills or debts should be paid, and what discretionary distributions, payments or gifts, if any, should be made. The fiduciary is required to maintain complete and accurate books and records for all funds and assets being managed, and to provide complete accountings if requested. Tax returns may also need to be filed. A fiduciary caring for an incapacitated person may also need to decide what sort of care that person should receive, including where he or she should live, whether to have in-home caregivers or move the person to a care facility, and whether to “pull the plug” if the person has a terminal medical condition. While carrying out these responsibilities, a fiduciary is burdened by the knowledge that all decisions are potentially subject to court review and if a court determines that the fiduciary has breached a fiduciary duty, the fiduciary could have personal financial liability. Unless the governing instrument provides otherwise, a fiduciary is generally entitled to be paid “reasonable compensation” for serving in this capacity. Given the demands and responsibilities placed on the fiduciary, this is only fair. However, this also adds one more stressful decision: whether to accept payment (particularly in a family situation where other family members are providing some care or services without payment), and if so, how much to charge. Not everyone is a good candidate for appointment in one of these roles. A family member with a demanding career may not be able to devote the time and attention needed to properly carry out his or her fiduciary duties. A family member who has trouble managing their own financial affairs is probably not a good candidate. A family member who lives far away from the principal may not be a good choice. Also, picking one child over another, especially if siblings are not on good terms, can lead to problems. The ideal fiduciary will be fundamentally honest and sincere, have the highest integrity, be able to act decisively and fairly, and be willing and able to devote the necessary time and effort to carrying out the responsibilities of the position. This may be a family member, a trusted friend, or a professional, such as the long-time family CPA. It may also be a private professional trustee or a bank or trust company. It is often advisable to name an institution as an alternate “safety net” agent, executor or trustee, in the event that the individuals named are unable or unwilling to serve. Not all banks or financial institutions can serve in these roles – only those with trust departments licensed by the State. Most trust departments are willing to serve as a successor trustee or as an executor. They may also be willing to serve as an agent under a financial power of attorney, but they will not agree to serve as an agent under a medical power of attorney. However, these institutions have minimum account sizes – ranging in some cases from a minimum of $500,000 of investable assets to $1 million or more -- and they will decline to serve if the value of the assets they are to manage falls below their minimum. For this reason, it is now becoming common to find individuals in the business of serving as trustees, executors and agents, particularly for smaller estates that do not meet bank minimums. California has set up a licensing bureau for private professional fiduciaries, and requires all persons to be licensed who are acting as a trustee or agent under a durable power of attorney for health care or for finances for more than three people or more than three families at the same time who are not related. Texas does not yet have a licensing requirement, but given the need for professional fiduciaries for smaller estates where there are no appropriate family members to serve, over time we may see more private professional fiduciaries setting up shop in this State. Until then, some accountants and attorneys, who have ongoing relationships with their clients, may be willing to serve as fiduciaries when clients do not feel any of their family members or friends would be a better choice. The main point is that clients need to understand what is involved in serving as an agent, executor, or trustee in order to make wise choices as to who should step into their shoes to manage their affairs should they become incapacitated, and to administer their estates after they have passed away. Picking the right fiduciaries is essential in order for a carefully thought out estate plan to work as intended. And it is usually desirable to name alternates, in the event the initial persons named are unable or unwilling to serve, and to designate an institution as a final alternate “safety net” fiduciary.

[The author is a Woodlands-based estate planning attorney at the firm of O’Donnell, Ferebee, Medley & Frazer, P.C. He is licensed to practice law in Texas and California, is a board-certified probate, estate planning and trust law specialist in California, and holds an advanced law degree (LL.M.) in taxation. He can be reached at (281)875-8200. The firm’s website is www.ofmflaw.com.]

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