Posted: December 23, 2009
Fiduciaries aren’t just for the wealthy
And naming one can be trickier than you might thinkMarti Brust
One of the most important items in estate planning is naming the fiduciary or fiduciaries who will execute wishes and manage assets after death, or at such time an individual is no longer willing or able to handle their own financial affairs.
A fiduciary is a third-party representative who is appointed to act for the benefit of someone else. Two of the most common fiduciaries in estate planning are the personal representative, who handles assets that pass under an individual's last will and testament, and a trustee, who handles the assets that have been placed in a trust.
Choosing the right individuals or entities for these roles can be challenging, but an informed and educated decision can ensure a smooth transition during a difficult time. Technically, anyone can be named as a fiduciary; however, as laws have become more complicated, the need for a professional corporate fiduciary has increased exponentially. Here are three common misperceptions about naming a fiduciary:
1. Anyone can be a successful fiduciary.
Many people believe handling an estate is a simple process that anyone can easily handle. Individuals underestimate both the amount of work and the expertise needed to carry out required duties. There are a variety of laws (depending on the state) that must be properly navigated, including complicated probate laws, the Uniform Trust Code, the Principal and Income Act and the Prudent Investor Act. Additionally, there are several other areas in which fiduciaries need to be subject matter experts.
Accounting for estates and trusts can be extremely technical and require excellent record-keeping and tracking. Fiduciaries must be able to demonstrate through proper accounting that they have handled and managed the estate in an accurate, fair and unbiased manner. If an individual is lacking in knowledge or organizational skills they are at risk for liability and personal fines.
Tax planning is also a necessary expertise; it's imperative that an estate or trust is run in a tax-efficient manner. Fiduciaries must understand how their actions will impact the estate or trust and the beneficiaries. This includes how assets are invested and distributed as trusts are subject to different tax rates and laws than individuals or corporations.
A professional can adeptly advise and maneuver through these technical and sometimes obscure areas. It's their responsibility to be experts and to stay abreast of changing laws. The professional fiduciary is immersed in this information on a daily basis and is well-equipped to handle complicated processes and can also strategically troubleshoot or advise on unique or challenging situations.
2. Everyone will get along.
Secondly, people falsely assume that family members and friends will amicably work together and agree on how assets should be handled. Unfortunately, this utopian idea is one that is rarely realized. Appointing a family member or friend frequently causes tension or distress amongst family members and beneficiaries that often times did not exist prior to such appointment. If not handled properly, what was most likely believed to be a gift of freedom by the deceased can easily end up being an extremely divisive decision resulting in significant stress, damaged relations or, in some cases, legal action.
A professional will help ensure the client's wishes are carried through to fruition. Unlike loved ones, independent professionals can adequately separate themselves and implement the client's wishes without the risk of damaging important relationships.
Also, if liability becomes an issue, it is less traumatic to take legal action against a corporation than a family member or friend. Not only is it much less personal, it's more likely that a loss may be recouped.
3. Only wealthy people need fiduciaries.
Finally, many believe that professional fiduciaries are only applicable to those with substantial wealth. However, employing a professional fiduciary is cost-effective for more than just the high-net-worth individual. Individuals often assume it's more expensive to hire a fiduciary to handle all aspects than to seek individual counsel from different experts as needed. However, in many cases, a fiduciary's cost will be equal or less expensive and, as discussed previously, can also eliminate stress, hardship and liability.
At the end of the day, everyone should research their options to determine the appropriate fiduciary for their situation. Designating a professional to efficiently and quickly handle these details in a difficult time is truly one of the best gifts a person can leave behind.
Marti Brust is a senior vice president and wealth advisor for UMB’s Investment and Wealth Management division in Denver. Marti may be contacted via email at firstname.lastname@example.org.