The contents of this website provides general information, is not advice and should not be treated as such.  Do not rely on the information on this website as an alternative to legal advice from an attorney and, if you have any specific questions about any legal matter, you should consult your attorney.

Friends As Fiduciaries?

Clients often choose a relative or a close friend as executor or trustee (a fiduciary) of their estate. It makes sense, they trust them during life and trust their judgement when they stand in their shoes so to speak. However, the job can prove more difficult than either of them imagined.

A fiduciary must carry out the terms of your client’s plan at the very time she is grieving, and many times she is unfamiliar with the ins and outs of the job’s responsibilities. She may not have enough financial knowledge to understand what’s expected or may miss important deadlines due to a lack of understanding, often costing some serious penalties for the estate.

Costly Mistakes

A Forbes article from earlier this year highlighted the case of a 73-year-old high-school-educated homemaker, Janice Specht, who was executor of her elderly cousin’s will. Due to a combination of negligence and errors, the cousin’s $12.5 million estate was charged $1.2 million in penalties, interest, and estate taxes.

As it turns out, the lawyer who drafted the cousin’s will faced a battle with brain cancer after the cousin’s death and missed important deadlines for requesting extensions on tax returns. Having relied on this attorney to keep everything on track, a year went by before Specht ultimately had to hire a new one.

Distant relatives filed for malpractice, removing Specht as executor and pushing for a new co-fiduciary appointment. Specht is now on the hook for paying the penalties and interest. She failed to make her case in district court and has filed an appeal.

According to Forbes, the district court judge noted “the factual circumstances are both complex and sad,” but “reliance on counsel cannot constitute reasonable cause for the late filing and payment of taxes.”

Person Over ’Puter

Some folks may be tempted to use free or budget-priced online resources to help with executor duties.  Unfortunately, inexperienced executors may unwittingly believe using these software sites are all they need in order to complete their duties adequately. Just as TurboTax does not replace the expertise of a good accountant, online executor-in-a-box tools are not a replacement for professional legal advice.

In addition, while fiduciaries are often eligible to receive reasonable compensation for the duties that are required, that payment becomes taxable income. If the executor is a family member who stands to inherit anyway, then they are sometimes better off waiving the fee and simply collecting their inheritance. If the estate is large enough to be subject to an estate tax, then the executor should definitely work with an experienced estate planning attorney and tax advisor.

Trustees – or Better Yet a Team of Trustees

In the case of a trust, your client named a trustee to manage his estate and the disbursement of the assets to beneficiaries. In some cases, your client might be better served by having a team of trustees – with each one pulling from a different area of expertise or experience. If the trust is expected to last a long time or there are substantial assets, having more than one person managing things can be ideal. However, there can be downsides, too. Naming family members as co-trustees can lead to tensions, especially when children are equally named as trustees. Naming too many trustees can also cause problems if their roles are not clearly defined.

Mistakes Can Be Anticipated

We recommend that you warn clients about these potential fiduciary issues.  If they plan to name an executor with no experience, encourage them to set up a meeting between the executor and their estate planning attorney, even for a simple thirty-minute conversation, to discuss the expectations and obligations that go along with the job.

Being named an executor of an estate is a big responsibility, and your clients need to be aware of potential pitfalls. Be straightforward with them if you are afraid that the executor they want to name is not up to the task. It is much easier and less costly to resolve these issues at the estate planning stage rather than after the fact.

We hope this information was useful to you and helps your clients and their families. If you have a specific case or a question, don’t hesitate to call our office.