The Art of Choosing a Fiduciary

by KOHLER LEGACY LAW GROUP

April 4, 2024

In making potentially life-changing decisions for you, the trustee of your trust, the executor of your will or the agent under your power of attorney is acting on your behalf in a fiduciary capacity. As such, they are subject to a myriad of duties imposed under the law and under your trust, will, power of attorney or other applicable document. It is easy to see why selecting a fiduciary is one of the most important decisions to be made in estate planning. Sadly, we have seen how a bad fiduciary choice can result in improper conduct, family conflict and excessive legal costs. Here are some things to think about as you consider this important decision:

Qualifications

Character. At some point, your fiduciary will take over the management of your assets and will make critical decisions affecting the lives of you and your family. You must have complete confidence that they will never misappropriate your assets or allow their own best interests to dictate their decisions. If the person you have in mind for a fiduciary has already shown you in their personal life that they are capable of self-dealing, manipulation, irresponsibility or worse, they are not the right person for the job.

Cooperation. Your fiduciary need not be an expert in all things. Your fiduciary should be open to building a competent team of professionals to assist with investments, taxes, legal matters and business issues, and to ensure compliance with all fiduciary protocols. This is an area where a fiduciary can be penny-wise and pound-foolish. If your fiduciary fails to get proper counsel early on, it could create serious legal and financial problems, and increased costs, later.

Communication & Compromise. Your fiduciary will likely have to have at least one difficult conversation with, or make at least one difficult decision affecting, a beneficiary or other person involved in your affairs, so they should not be a communication or decision-making “avoider.” They should sincerely listen to the thoughts of those they serve. If there is an honest disagreement, they should be open to a reasonable compromise. If the person you have in mind tends to think “it’s my way or the highway” or likes to flex their muscle to show they are in control, they probably are not the ideal fiduciary.

Commitment. Acting as a fiduciary is time-consuming and often stressful. It is a serious job that requires diligence and attention, often with some urgency. There is also exposure to personal liability. Your fiduciary should have a good sense for decision-making, be attentive to the needs of those they are acting for, dedicate the time required to carry out the necessary tasks and keep careful records of their actions and expenditures. If the person you have in mind is already intellectually, emotionally and physically maxed-out with their own family, work, travel, social or charitable obligations, or if they are dealing with health issues, think carefully about whether they are right for the job.

Options

If you have a family member, friend or trusted professional advisor who checks all the boxes above you are very lucky. But what do you do if you are not in this lucky group? Perhaps you have two candidates who can work together, each bringing different skills to the table and providing a check-and-balance? A co-fiduciary arrangement is not uncommon, but it creates its own set of issues that warrant further consideration.

Another option may be the use of a professional trustee, such as an individual, licensed private professional fiduciary, a bank or a trust company. Professional trustees have come a long way in recent decades, and, fortunately, we have local access to many experienced and excellent professional fiduciaries. A discussion of the benefits these professional fiduciaries can provide is beyond the scope of this article, but if you think this may be the solution for you, contact us for further guidance.

For a trust, a brand-new option in California is to use a “directed trustee.” The directed trustee, typically a professional trustee, handles back-office tasks, such as record keeping and tax filings, but receives instructions on things like investments and distributions from appointed third parties known as “trust directors.” With this option, you may secure many of the benefits of a professional trustee for a fraction of trustee fee or where a professional trustee may otherwise be unable to act (for example, where the trust holds an interest in a family business).

Common Pitfalls

Here are several common pitfalls to avoid in choosing a fiduciary:

  • Falling back on the default “oldest child acts first” is convenient, but it ignores a thoughtful consideration of the points discussed above. Also, sibling relationships must always be taken into account. Even with the most loving of siblings, putting one in the position of making important decisions for the other may cause an end to their friendship.
  • As noted above, a co-fiduciary arrangement is possible, but if your children do not have a history of cooperation, trust and harmony, these bonds will not magically be created on your incapacity or death. In fact, our experience shows the opposite to be true – frayed relationships often do not survive the incapacity or death of the parents, as childhood rivalries and perceived injustices are revived and the reason for behaving well no longer exists. The same tends to be true for step-parent/step-child relationships.
  • You may trust the person who comes into your house every day to help with your most intimate needs. However, due to the frequency of financial elder abuse by caregivers, California law now limits the ability of caregivers to act as a fiduciary for those they care for.
  • While California law entitles all fiduciaries to be compensated for their time, often a family member or friend who acts will waive the right to compensation. However, this is no guarantee that cost savings will result in the long run. For example, a family member or friend acting as your fiduciary will likely need far more attorney and accountant hand-holding than a professional fiduciary. Also, a family member or friend who fails to get and follow proper guidance, or who does not possess the character traits described above, is more likely to make mistakes that require costly remediation down the road.

Over the years we have seen our clients struggle with the selection of fiduciaries, sometimes to the point of delaying the completion of their estate plan. If this is happening to you, let’s discuss the information contained in this article, so that you feel comfortable with your decision.

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