One of the most difficult decisions to make in any estate plan is in selecting the individual or entity who will be responsible for carrying out your instructions in the event of your lifetime disability, or death. There are a number of factors to consider and each situation is unique and depends upon a variety of factors including the size of the estate and the type of assets included in the estate.
In selecting an executor (for a Will), trustee (for a Trust), or agent (for a Power of Attorney), it is important to remember that the individual you select is someone that you and your beneficiaries are going to be working with for an extended period of time. For the purposes of this blog I will refer to all of these individuals as “Agents.”
You will want to be certain that your Agent has the expertise and personal characteristics needed to carry out what can be significant responsibilities, particularly if you own real estate or own a business. Here are some factors that you will want to take into account in selecting an Agent to handle your affairs during a lifetime disability or after your death:
1. Expertise. An Agent will need basic skills necessary to file tax returns and pay taxes, or have access to professional advice to assist with such matters. The Agent will need to be able to determine the extent of all assets and obtain valuations of those assets. Accounting for all revenue received into the estate, the payment of bills and ultimate distribution of assets to beneficiaries, also requires the ability to prioritize and communicate effectively with professional advisors and family members. A family member without such expertise might have other desirable qualities, but it is essential to ensure that the practical aspects required to handle your affairs are properly covered.
At a minimum, you must feel confident that your choice will be fair-minded, and display common sense, including the wisdom to seek and heed sound professional advice when it is called for. Finally, your Agent should be the type of person who gets things done—not a procrastinator and not likely to be flustered as problems arise.
2. Responsibility. In accepting an appointment as an Agent, an individual takes on a variety of responsibilities to the beneficiaries and can face personal liability to them or to other third parties, including the IRS, if he or she fails to carry them out properly. It is important that this is understood by any Agent you select. A friend or family member may want to be an Agent because they like the idea of helping you and your children, but their attitude might change if they understand that your children may be able to sue them if they make a mistake.
3. Integrity. An Agent takes on a position that could easily be abused by an unscrupulous person. It is imperative you appoint someone of the utmost integrity. Do your due diligence, even on seemingly respectable professional Agents.
4. Continuity and Succession. An individual Agent could die or retire during the lifetime of a Will, Trust or Power of Attorney. The instrument should provide a mechanism for ensuring that there are successor Agents appointed in the event this occurs.
5. Overall Cost. Professional Agents provide the necessary expertise and they will charge a fee for their services. It may be less expensive to appoint a trusted family member or friend, and have her supplement her expertise with appropriate professional advice. On the other hand, such a situation could end up being even more expensive, particularly if the family member is not skilled in handling your assets, or is unaccustomed to working with and supervising professional advisors. One thing to think about here is that professional Agents are normally covered by insurance in the event of a claim or loss, individual Agents are not.
6. Combination of Different Types of Trustees. Frequently, people setting up Wills, Trusts or Powers of Attorney, appoint a small group of Agents that collectively have all of the characteristics needed to effectively carry out their instructions. For instance, one might appoint two trusted individuals to serve together along with a professional Agent.
7. Appoint Yourself as Trustee. It is also possible for you to appoint yourself as an Agent and normally that is what will be done if you are establishing a revocable trust in your own name. The obvious advantage to this is that you maintain complete control until disability or your death. The disadvantage is that there could be a tax-related question as to whether you have retained a personal interest in the trust property. In addition, a self-trusteed trust does not provide you with creditor protection.
8. Naming a Family Member as Your Trustee. People often choose a loved one “automatically.” In some cases the choice may be the person best suited for the role. However, think about the possibility of a dispute among other family members or your beneficiaries. For that reason, it is best to keep sentiment out of your choice of an Agent. Naming multiple children as co-Agents is usually a bad idea, as it complicates the decision making process and completion of transactions by requiring two or more people to agree to—and sign off on—everything. When one child is not well suited to the task but you don’t want him to feel left out, it is almost always a mistake to assign it to him anyway. Including that child as a co-Agent will complicate matters at best, and at worst it will invite costly disagreements or bitter personal disputes. If this is a potential problem, consider using a professional or a trusted friend as an Agent.
Summary. The decision about whom to appoint as an Agent is not one to be taken lightly. A poor choice could significantly affect you and your beneficiary’s future. In making your choice, you will want to think carefully about whether your Agent (either individually, or collectively with the other Agents you appoint) has all of the expertise and character required to do the job properly. You should also discuss the selection of an Agent with your attorney so that a solution specific to your unique situation can be implemented.