Estate Planning means something different to everyone. As I spent a lazy Saturday with my wife watching past episodes of the television series House, I wondered if a conversation with my clients about estate planning was more like a conversation with Dr. Wilson, an oncologist on the show. When Wilson delivers the bad news, he is often thanked by the dying patient to the surprise of the star of the show and his best friend, Dr. Gregory House (“House”). House is cynical, crass and yet a genius doctor who has a chronically injured leg requiring the use of a cane, which he neatly secures to a motorcycle he rides to work (and parks said motorcycle in handicapped parking).
The show does a good job of dichotomizing Wilson and House, at least to the extent of bedside manners. Wilson is soft spoken while House is often unbearable and probing. When House delivers bad news, the show is premised to have the viewer think House enjoys informing the patient they have a rare, incurable disease, just to cure the disease by the end of the show. The deeper meaning of the show, however, is when the patient realizes House actually helps them resolve some deep personal issue in their life, albeit through a method similar to the pressure of the earth on a piece of coal to make a diamond.
The estate planning process and selecting the right Trustee
When we hear the words estate planning, our minds wonder to the climatic event of death, like an episode of House. Death is a part of it, yes, but it is not the whole picture. It is of little help and often counter-productive that our reference point for estate planning is mistakenly compared to other professional activities. We frequently go to professionals like doctors, bankers and accountants. We perhaps see a lawyer sometimes for business and personal reasons. Those meetings are usually for limited medical, tax, financial and legal compliance. They are by and large transactional, like House (he cures death or, rarely, he doesn’t).
Estate planning, on the other hand, is a continuous process of positioning assets for the best ongoing future tax and succession results for everyone we love (and perhaps do not love, like the IRS) – and not just what we need at the moment (like a House patient). Regrettably, the estate planning conversation often returns to the uncomfortable subject matter of death and, consequently, the pressures like those seen in an episode of House.
Another area that bears a resemblance to House is when the estate planning is near completion. Specifically, the area I want to focus on is the selection of a Trustee (and/or executor). After spending weeks or months on a carefully designed estate plan, the attorney and advisors ask the question, “Who do you want to be the Trustee?” I have witnessed clients become impulsive because they think this is a life-or-death decision that must be made in the moment, much like in a House episode. I see the coal turning to diamonds. It has its own climatic script.
And, without fail, the client will initially select any or all of the following:
- Their spouse. This can be tricky for tax law and sometimes family harmony.
- A child. This has similar complexity to choosing a spouse and many times is based on four often erroneous factors:
- if the child is involved in the business/responsible, and
- if the client likes/dislikes a child’s spouse,
- Uncle Joe, who usually has no idea he has been named until the ink is on paper. This is not as problematic for family harmony and can resolve some tax law issues associated with other family members.
- The CPA, attorney or financial advisor who may decline for various ethical or liability reasons.
This decision feels right when choosing the people above – but is it? Should this decision be knee jerk like in House or as thought out as the plan itself? Without a carefully selected Trustee, isn’t the plan simply a stack of papers if the party does not understand the design of the documents, what the documents state, and his/her sole duty to continuously administer it?
7 questions to ask before naming someone your Trustee
There is a potentially intrusive list of questions an advisor should ask the client about these relatives or close friends. These questions could be considered too personal for some advisors who have a hard time balancing being Wilson or House. Let me go ahead and note that, most often, this requires being House.
If you have not heard these questions asked, take note. I find this awkwardness peculiar at best because the attorney and team of advisors have likely discussed the most personal of details with the client, but it is somehow considered taboo to suggest that these relatives or close friends might not be capable and may not want to serve as Trustees. The key point is to take it personally, but not too personally; this is not when you are picking your “favorite.” Being your favorite is not the goal here.
Here are the seven potentially offensive questions:
1. Have you been a Trustee before (i.e., do you understand what it means to be a Trustee and therefore understand what you are asking of a loved one)?
2. Have any of the people you named been Trustee before?
3. Does the Trustee or executor know what a Form 1041 is?
4. Does this person have the time?
5. Is this person financially stable and in a similar financial situation to you? Does this person get along with other family members? Do the beneficiaries understand this person will be in a position of power over them?
6. Are you aware that the person selected could be risking their personal assets to do this job and that there is no insurance they can buy to protect against this risk?
7. Are you simply naming this person to resolve a conflict in the family later that you cannot? Are there personal issues you are not squarely addressing?
How directed trusts may be a solution to this conundrum
The often overlooked solution to this problem is to name a professional Trustee and then name family members, like Uncle Joe, as trust advisors and/or protectors, with successor advisors/protectors in the family. This increasingly common feature in modern estate planning and asset management is known as a directed trust. In a directed trust, the terms of the trust grant a person other than a Trustee power over some aspect of the trust’s administration, such as investments, distributions, removal/replacing a Trustee, amending the trust and so on. Several states have such laws, including Tennessee and recently Georgia under its version of the Uniform Directed Trust Act.
For example, naming Uncle Joe as Trustee, to a client, is an honor. It shows trust in Uncle Joe as to his character, loyalty and decision-making abilities. Uncle Joe surely will enforce the terms of the trust in a way that will be respected by the beneficiaries. Uncle Joe will not steal money from the trust. Uncle Joe is retired and has time to do it perhaps. However, Uncle Joe can do all of these things as a trust advisor or protector without the inherent burden of being the actual Trustee.
Being a trust advisor or protector, in my view, does not require any experience, just that the person is trusted. A Trustee, on the other hand, must maintain records, handle the accounting, manage the investments of the trust, answer to regulators and have the infrastructure to undertake all of these matters. They must also bear the burden of liability through adequate capitalization and insurance.
Understanding the true cost of Trusteeship
Another fallacy in the Trustee decision-making process is that a professional trust company will charge a fee for service. If Uncle Joe has never been a Trustee, then his impulse will be to state that he perhaps won’t charge anything. However, what goes unsaid in these conversations is that Uncle Joe and the client may be comparing Trusteeship to when Uncle Joe helped paint the house for free. It could be that Uncle Joe thinks that the attorneys and accountants will handle all of the paperwork. He will just have to show up every once in a while, perhaps telling a beneficiary they can’t buy that new car or should invest for the future.
Uncle Joe and the client must realize, through an educational process, that Uncle Joe must apply a higher standard of care to the client’s assets than his own. The point here is that Uncle Joe must treat your assets like a bank would treat your assets, then worry about his own assets. He has a fiduciary responsibility, which means that his personal needs come second to your assets and needs of the trust. He would be advised to tend to the trust before his own matters. Uncle Joe may be on vacation, sick or can’t get away from work, but if something must be done for the trust, the trust will have to take precedence or Uncle Joe is personally liable.
What can result is that when Uncle Joe realizes all the work involved after accepting the position (which is a bad time to realize it), he might begin to charge fees and ultimately charge more than a professional trust company – or simply resign. A professional trust company has economies of scale to charge a fair market price for the service where Uncle Joe likely does not have a point of reference.
Then, for all of this trouble, Uncle Joe has to have his own estate plan. Uncle Joe will eventually become disabled or die. He is a temporary option at best. After we run out of candidates that can fog a mirror as Trustees, a professional trust company could be involved anyway if anything remains. The last logical station of this Uncle Joe planning train is to either 1) name a professional Trustee as the last option, or 2) let the local court do it for you. Would you rather vet this unknown entity now or have someone else do it for you later (Uncle Joe, a beneficiary, the court, etc.)?
Do you want Uncle Joe to be Trustee, or do you trust Uncle Joe?
There is a big difference between Trustee and trust in this context. A Trustee is to be trusted about all matters they undertake, but they do not have to undertake all matters (such is the case when there are trust advisors and/or protectors). Uncle Joe is trusted but may not be the best candidate to take on all matters of a Trustee (which renders him a great candidate to be a trust advisor and/or protector).
If you trust Uncle Joe, then perhaps the best place to start the Trustee vetting process is to determine if Uncle Joe should be a trust advisor or protector instead of the Trustee. Ask your professional advisors about this as the Uniform Directed Trust Act was only recently enacted in Georgia last year, opening possibilities not presented to you before. This extra step, in my experience, of picking the right person for the right job, usually makes everyone much happier and does not present the pressure of a true Trustee vetting process for dear Uncle Joe.
The estate planning process is certainly a time for reflection but not one to turn coal into diamonds or experience the ups and downs of a House episode. Take due time with this decision. Interview Uncle Joe and some professional trust companies. See where there might be holes in your planning with all Trustee options. When approached systematically, objectively and with the help of trusted advisors, it can bring peace of mind and harmony – leaving those climatic, life-or-death decisions to Hollywood – where they belong.
Eric S. Ratliff, JD, LLM, is a Tax Partner at Moore Colson CPAs and Advisors. He has over 13 years of income, estate and trust tax planning experience working with financial institutions, tax-exempt entities, individuals and high-net-worth families to create strategic tax structuring and business planning solutions. He has extensive experience providing value-added tax planning, research and compliance through the use of sophisticated income, estate and gift transfer tax techniques.