This article is the second in a series of nine articles explaining the Eight Goals of a Good Estate Plan.
This article will explain how an estate plan can help you with the first goal of a good estate plan: Appointment of Fiduciaries and Distribution of Assets.
For the sake of readability, I have broken this article into two parts. Last week’s “part A” discussed distribution of assets. This “part B” will discuss appointment of Fiduciaries.
A “fiduciary relationship” is an ethical or legal relationship of trust between two parties. Fiduciaries are responsible for managing some aspect of another individual’s affairs, and are held to a high standard of responsibility and care in the management of those affairs.
An important aspect of a good estate plan is appointing the right people to manage your affairs if you are unable to do so yourself. The typical fiduciary roles created by an estate plan are:
Fiduciary relationships require a great amount of trust on the part of the person creating the estate plan. Although other loved ones will be able to challenge the actions of your named fiduciaries, this is a difficult process, usually requiring a court proceeding. It is therefore of utmost importance to carefully plan which trusted individuals will fill these roles.
The trustee of a trust is the individual or corporation responsible for managing the assets of a trust for the benefit of the beneficiaries, within the constraints imposed by the language of the trust. Our married clients will often create joint revocable living trusts. In this scenario, so long as both clients are alive and mentally competent they are both the trustees and the beneficiaries of their trust, meaning that the clients’ only obligation as trustees is to manage the trust assets for their own benefit.
However, the clients will usually name one or more successor trustees who are empowered to act as trustee if both of the clients are unable to do so through either death or mental incompetence. The progression of trustee responsibility in this case looks like this:
Often, my clients will place age or other constraints that will limit their children’s ability to access trust assets without the consent of the trustee. Typically, clients will direct that their children can have unfettered access to 1/3 of the assets at age 21, 2/3 at age 25, and the entire pool of trust assets at age 30. Prior to that time, the trustee will have discretion to distribute the amounts that the children do not have unfettered access to, based on the trustee’s judgment with respect to the best interest of the child. For example, if a 22 year old trust beneficiary wants to cash out the trust fund to buy a Porsche, the trustee may deny that request, but the trustee may allow the child to cash out the trust fund to pay for college.
One of the goals of a good estate plan is to avoid probate. If this goal is accomplished, the trustee will be the individual responsible for distributing the estate assets to the heirs. However, if for some reason the estate is required to go through probate, the executor is the individual named in a will who is responsible for managing the probate estate. The duties of an executor are similar to that of a trustee, except that the executor must retain an attorney and work through the probate court to ensure that creditors and heirs are paid properly from the estate.
For clients with minor children, naming a guardian is often the most important aspect of an estate plan. The guardian, who is named in the will, is the person who will have the legal authority and responsibility for care of your minor children if you pass away or become mentally incompetent. This can be a different person than the trustee of your trust. Sometimes clients will name different people as trustee and guardian in order to create a system of checks and balances: the guardian is responsible for the children’s life decisions and care, while the trustee holds the power of the purse.
The agent named in your financial power of attorney is the person responsible for handling your financial and legal affairs (other than managing trust assets) if you become mentally incompetent.
The agent named in your healthcare power of attorney is the person responsible for making healthcare decisions on your behalf if you are not mentally competent to do so.
The guardian of your person that you name in your healthcare power of attorney is the person who will be responsible for making major life decisions and arranging for your care if you are not mentally competent to do so.