The 2020 U.S. presidential election is around the corner. With its outcome shrouded by uncertainty, and such rich disparity between the tax plans proposed by various candidates, now is a critical time to review one’s current estate plans and ensure that all possible tax planning avenues have been considered and implemented.
As part of this review process, considering who is the designated executor on one’s estate plan should be high on the to-do list. While deciding whom to name as an executor is often an afterthought among clients, effective implementation of their plan may depend on it.
This lack of attention, and failing to have a policy in place for revisiting one’s designated executor, can result in the wrong person serving in the role, ultimately leading to financial waste and lasting family conflict. That may be in the form of unnecessary taxes, higher than needed expenses, or extended uncertainty due to audits and potential family conflicts.
Selecting an executor is a two-part exercise: First, decide if there is someone within the family who can play this role, and second, evaluate whether a corporate executor makes more sense. For the first part, consider the following:
- Scope: What is this person being asked to do? How complex is the estate? Are the assets relatively simple, or are the assets and tax situation more complicated? For wealthy individuals, the answer is usually the latter, in which case the question shifts to whether an individual is adequately qualified to take on this level of responsibility.
- Skills and Capacity: What capabilities and capacity do the people around the client possess? If the client’s son, for example, doesn’t like managing his own finances, he is probably the wrong person to appoint, irrespective of how close he is to the client. If the client has financially savvy family members, what is their capacity? Do they have a busy career? Will they be raising young children, or do they care for a disabled child? Time is a critical consideration, as settling an estate is a time-intensive job. Handling an estate can be a nearly full time job in itself, requiring significant attention to detail as the executor tracks down every asset, values each one, determines the need for a second valuation after months, evaluates various tax elections, prepares the various tax returns and responds to any audit and manages all of the communication and expectations of the beneficiaries.
- Family Dynamics: What dynamics will this person need to manage? Are there family members, including spouses and other in-laws, who don’t get along? Can the executor make objective decisions when considering topics that impact others family members? Do not underestimate the challenge of residual undue stress and conflict. Naming two brothers who haven’t spoken in 20 years as co-executors (as occurred in one estate the author handled) is a formula for excessive attorney fees (each hired his own attorney), conflict (every issue was escalated into a disagreement) and significant wasted time (calls were required with each brother and his attorney for every issue).
If you have completed the above questionnaire and concluded that no one in the family can meets the criteria, then it is time to consider part two of the exercise: hiring a corporate fiduciary to fill the gaps.
A corporate fiduciary, by nature, is impartial. The professionals involved do not have a stake in the family, nor are they subjected to its dynamics. Because estate settlement is their job, they also bring the necessary expertise to do it right.
It’s important to keep in mind that this does not need to be an either-or decision. An often overlooked solution is finding an effective balance between naming an individual and a corporate fiduciary as co-executors. The individual understands the family’s history and background, whereas the corporate fiduciary has the specialized knowledge and capacity to ensure one’s wishes are optimally executed.
How can you help your client choose the right corporate fiduciary? Look for a company that has settled estates like that of your clients, both in terms of size and asset types. While there are many great corporate executors who handle $500,000 estates all day, every day, for example, these firms are not necessarily the right solution for a $15 million estate. Similarly, if your clients have assets that are difficult to value, that might raise issues with the IRS. The firm chosen should have experience anticipating what those issues are. Finally, be sure the corporate fiduciary is one who is looking to partner with the client’s other advisors to form a collaborative team for the client and their family.
So what’s the bottom line?
First, do not underestimate the time it takes to settle an estate. Understand that your client will be asking his or her executor to take on the equivalent of a part- or even full-time job for an extended period. Even with your help, much of the legwork may fall on the executor, who needs to have the time to commit to the role.
Second, fully appreciate the potential for conflicts to arise. Family dynamics and emotions are powerful and complicated. In addition to making the right executor selection, helping your client to discuss their plans ahead of time ensures everyone is on the same page and can go a long way in mitigating future conflict.
Last, chose carefully. It is essential to the proper implementation of the estate plan that the right person or company take on this important role. And be sure that you, as an advisor, are ready to work with the executor to carry out your client’s wishes.
Stacy Singer is a senior vice president and the national practice leader for Trust Services at Northern Trust.