Who should handle your estate?

Have you named relatives or friends as executors or trustees? You could be making a big mistake.

By Diane Weber
Senior Editor

A surgeon named his brother as trustee of a $1 million trust for his wife. Because his brother was a businessman with financial management experience, the doctor was sure the assets would be managed so that his wife would be able to continue their comfortable lifestyle.

But things took an unexpected turn after the surgeon died, recalls Colleen H. Nemanick, a Creve Coeur, MS, attorney who specializes in estate planning. "His brother told the doctor's widow, 'I always felt you and Bob wasted your money.' So he put her on an allowance too modest to support her fashionable wardrobe, travel, and country club membership. Then he reinvested the rest of the income to build her assets—even though there was really no need to."

Tales like this are more common than you might expect. Once you're gone, your heirs may have little recourse against a misguided executor or trustee. The surgeon's widow, for instance, would have had to take her brother-in-law to court and prove wrongdoing to have him removed—an unlikely prospect, since he was so carefully safeguarding her assets.

How can you choose an appropriate executor or trustee? Here are points to consider.

Is Uncle Bill up to the job?

Not everyone is qualified to serve as an executor. Clearly, you need someone you can trust to be fair to your heirs and loyal to your intentions. But he should also be organized enough to handle the many facets of the job. The executor must submit your will for probate; locate, collect, and value your assets; collect any death benefits due to your estate; pay your outstanding debts; pay income, gift, inheritance, and estate taxes; and file the necessary returns.

True, your executor can hire an attorney and accountant to help. But he'll still need to keep track of what must be done to make sure the deadlines are met.

Good business sense is equally important, since the executor must also safeguard your assets, make investment decisions, and run any businesses you own—including your practice—until they're sold or distributed to your heirs. An executor who fails at these duties can be sued by disgruntled heirs and held liable for his actions.

Also make sure you choose someone who's likely to live longer than you do. Name this executor in your will, and in case he dies before you do, refuses the job, or moves away, also name a successor executor.

Although a trustee's duties are much more narrow in scope than an executor's, she will need the same qualities to do the job well. The trustee invests and manages the trust principal (with or without an investment adviser's help), distributes income and principal to beneficiaries as the trust document directs, files annual tax returns, and pays taxes on the trust income.

Your choice of trustee may be more crucial than that of executor, though, since the trustee may control the trust assets for decades. If that concerns you, consider leaving your heirs an escape hatch by specifying circumstances under which they could change the trustee—for example, if the investments in the trust underperformed the S&P 500 by more than 2 percentage points for three or more consecutive years.

Another solution: Require the trustee to get approval from a relative who's not a beneficiary before taking certain actions, such as invading the trust principal. Or name two trustees—a bank or trust company and a relative. You can have them share all the decisions and responsibilities, or assign each specific duties.

If you decide to hire an institutional trustee, compare several before making a choice, and make sure handling trusts is a major part of its business, not just a sideline. Ask clients of each institution whether they're satisfied with the service, and compare fee structures.

Perhaps the best way to make sure a trustee fulfills his role properly is to leave detailed instructions in the trust document explaining how you want the trust principal and income used. Can he invade principal to purchase a residence for the beneficiary? Lend the beneficiary money and, if so, for what purposes?

Too many cooks may spoil the soup

Suppose your three children are beneficiaries of your estate. Instead of settling on one to act as executor, you nominate them all.

That's a recipe for trouble. "Even siblings who have always gotten along well can start to squabble once Mom and Dad are gone and money is involved," says Gideon Rothschild, an attorney and estate-planning specialist in New York. "And if each child hires an attorney, the potential for disputes escalates."

Having more than one executor is also difficult from a logistical standpoint. There are lots of forms and tax returns to file, and collecting signatures from several executors can be a nightmare, especially if they live far apart.

Choosing an impartial third party sometimes prevents such problems—but not always, warns Colleen Nemanick. She tells of a physician with four children who left the job to a close friend. Although the doctor's will clearly stated how her cash and investments should be divided, she left no instructions regarding her personal effects.

"The kids are ready to kill each other over stuff that's not worth a hill of beans, and the friend is stuck in the middle," Nemanick says. "She has to have every nightgown and gardening tool appraised to prove she's being even-handed. Even then, she may have to divvy up some things by lottery to stop the fighting."

Fights can break out no matter who's executor. But leaving a detailed letter of instructions discussing your personal effects can help keep your heirs out of the boxing ring.

Be especially cautious in naming trustees or executors if you're on a second or third marriage and there are heirs from more than one "family" to consider. Ill will and differing priorities can cause nightmarish scenarios that can result in endless court battles.

Business and duty don't always mix

An executor must run any businesses until they can be sold or passed on to a beneficiary, so you might think a practice partner would make a good executor. Not necessarily, says New York attorney Joshua S. Rubenstein.

Suppose as executor your partner must place a value on your shares of the practice to calculate the estate tax. For tax purposes, he'll want to use as low a value as possible. But suppose he's also trying to arrange a bank loan to finance the purchase of some new equipment for the practice. He might be tempted to go with the high value that would be in his own best interest, even though it would cost your heirs money.

Or maybe he wants to buy your interest in the practice. As a buyer, he'd want to pay as little as possible. But as executor, he's obligated to get as high a price as possible.

If you're concerned that your executor won't be able to handle the daily duties of your practice, Gideon Rothschild recommends this solution: Make arrangements now for your associates to purchase your share of the practice upon your death. You might agree upon a price based on a predetermined percentage of the practice's gross billings. A solo practitioner should make such a purchase arrangement with an interested colleague. A buy-sell agreement is especially important for the soloist, since the value of his practice will quickly erode if the executor can't sell it promptly.

If your estate is fairly simple and your beneficiaries get along well, a family member or friend may prove to be a fine executor or trustee. But if conflicts already exist or your estate has grown complex over the years, burdening friends or relatives with these jobs may prove unwise. A hasty decision could cause your family unnecessary suffering later.

Who will care for your kids?

Though relatives and friends don't always make good executors or trustees, they may be ideal as guardians for your children. Just remember to ask whether they want the responsibility.

If you and your spouse have already chosen a guardian, reconsider your choice periodically. Perhaps your children have grown closer to another relative. Or maybe the guardian has moved, and your children would be miserable relocating and leaving friends and relatives behind.

Be sure you name a successor guardian. Otherwise, the probate court will have to assign another person if your recommended guardian isn't available. The judge's choice may be the last person you'd want raising your children.

You may not want to leave every important decision to the guardian, says New York attorney Gideon Rothschild. In that case, provide as much direction as possible in your will or a separate document. Do you expect the children to move, or do you want the guardian to move into your home with your children? Should the guardian be allowed to use some of your estate to buy a bigger home or to put an addition on his home or yours? Do you want the children to attend a particular private school? Take music lessons? Spend summer vacations with their grandparents?

If you leave money in trust for your children, make sure the guardian and the trustee will get along. Leave the trustee instructions explaining the guardian's role and monetary needs. You may want to give the guardian the right to decide when and how trust funds should be spent for the children, but leave the investment decisions to the trustee.

Diane Weber. Who should handle your estate?.

Medical Economics

2002;21:52.