When creating an estate plan, two of the more critical decisions you need to make are who to name as the executor and who you want as the trustee. The executor performs the short-term function of seeing that your will is executed according to your wishes. At the same time, the trustee is responsible for overseeing the trust and carrying out its instructions over the long term. Both are vital to the proper execution of your estate plan.
Since the functions of an executor are straightforward and guided by law, it’s easy to appoint a family member or close friend. Typically, executors are paid a stipend to cover their time and expenses.
You could also select family members or close friends as the trustee. However, because the trustee is responsible for overseeing, managing, and distributing the family’s assets, conflicts could arise among family members. This is why some people prefer to pay a professional trustee to manage their trusts.
What Does an Executor Do?
With most estates, the role of the executor is relatively straightforward and guided by law:
File The Will And Inform The Named Beneficiaries
The executor’s first step is to file the will in the local probate court at the state or county level. This is also where the executor is confirmed as the family’s personal representative and a date is set for the proceeding. The executor can then notify named beneficiaries of the probate proceeding.
Notify the Guardian of Minor Children
If children are involved, the executor must notify the named guardian. They must arrange for them to take custody of minor children and provide access to any financial support arranged for that purpose.
Inventory And Oversee Any Probated Assets
Most assets not held in a trust or designated beneficiary accounts are considered probated assets. That could include real estate, securities, and other investments or properties. However, assets held in qualified retirement plans, brokerage accounts, bank accounts, or any account with a designated beneficiary fall outside the court’s purview, as do accounts held as joint tenants.
The executor must locate and oversee all other estate assets during the probate period. Depending on the size and complexity of the estate, this can run just a few months or more than a year.
Take Care Of The Paperwork
The executor is also responsible for managing the estate’s administrative needs, filing paperwork with banks and government agencies, and canceling any open leases or contracts.
Create A Bank Account For The Estate
The executor must set up a bank account on behalf of the estate to receive any funds still owed to the deceased person, including earnings and stock dividends, which need to be distributed.
Represent The Estate In The Probate Process
Most estates must go through probate, a legal proceeding at the state or county level, to authorize the will’s validity. If the will is approved, the probate court authorizes the executor to follow the will’s instructions.
However, before any assets can be distributed, the court requires that any amount owed to creditors and tax agencies be paid first. The court also determines whether any assets that fall outside its jurisdiction can be distributed outside of probate.
Pay Expenses And Taxes
The executor must pay any expenses, such as utilities, file final state and federal income tax returns, and pay any outstanding taxes.
Take Care Of Outstanding Debts
The executor is responsible for contacting all creditors of the probate proceeding. The creditors then have between three to six months, depending on the state, to file a claim for outstanding debt. The executor must determine if their claims are valid before paying them.
Distribute Non-Trust Assets
The executor oversees the distribution of all the estate’s assets not held in trust to named beneficiaries. This may include cash in savings, real estate, and personal property.
Assets held in accounts with designated beneficiaries are automatically transferred.
Officially Close Out The Estate
The executor must contact the probate court to officially close out the estate after all creditors and tax agencies have been paid and assets distributed to beneficiaries.
It’s clear that the role of an executor, while straightforward, is very hands-on. The process typically lasts months. However, when a trust is involved, the role of a trustee can be much more extensive, lasting several years.
What Does a Trustee Do?
Many people have both a will and a living trust, also called a revocable trust. Living trusts are often used as part of comprehensive estate planning to ensure smoother and more efficient management of an individual’s assets.
The primary purpose of a living trust is to facilitate the management and distribution of assets during your lifetime and after your death while avoiding probate.
Typically, the trust’s grantor, or the person who creates a trust, acts as a trustee while they are living. The trust names a successor trustee upon the grantor’s death or if they become incapacitated. The trust can be structured to distribute assets over time, provide for specific needs, or create ongoing financial support for beneficiaries.
Other types of trusts, such as an irrevocable trust designed to remove assets from the taxable estate, cannot be controlled by the grantor. A trustee must manage the trust from its inception. The only way to change the trustee or terms of the trust is through the approval of the trust’s beneficiaries.
Trustees must generally follow the terms and instructions in the trust agreement. These typically include managing the assets until their distribution. However, a poorly chosen trustee could hinder the process, leading to unwanted family and legal implications.
The role and responsibilities of a trustee can vary depending on the type of trust and its terms. But generally, their functions include:
Fiduciary Duty
A trustee has a legal obligation to act in the best interests of the trust’s beneficiaries and manage their assets objectively with care.
Managing the Trust’s Assets
Trustees are responsible for following the trust’s instructions for managing assets, including investment management and managing properties. They are typically guided by prudent principles for preserving and growing the assets.
Asset Distribution
It is the trustee’s responsibility to ensure that the trust’s assets are distributed to beneficiaries according to the terms of the trust. This could include timed payment schedules, lump sum payments, or other terms specified in the trust document.
Record-keeping and Reporting
Trustees must maintain accurate records of all trust transactions and report periodically to beneficiaries or a court.
Tax and Legal Compliance
Trustees are responsible for ensuring that the trust complies with tax laws and other legal requirements, such as filing tax returns for the trust.
Conflict Resolution
The trustee may also need to mediate or seek legal resolution to settle disputes arising between beneficiaries concerning the trust terms.
The bottom line is that the trustee’s overall responsibility is to ensure that the wishes of the trust’s grantor are carried out correctly, ethically, and as intended.
Not All Trustees are the Same
Generally, you can choose between two types of trustees—individual or corporate—depending on the estate’s size and complexity and your family’s dynamics.
Individual Trustee
Some prefer to have someone close to or in the family as their trustee. For them, it’s a matter of trust and familiarity with the family, its goals, and the family dynamics.
Corporate Trustee
Others prefer to have their trusts managed and administered by a professional trustee and pay them for their expertise and experience. A corporate trustee can be a person or an entity, such as a bank or law firm. They come well-equipped with knowledge and resources to handle all the financial disciplines and trust management.
Selecting the Right Trustee for You
Choosing between an individual or corporate trustee often comes down to assessing your needs and requirements for the role. Naming an individual as a trustee can be less expensive, but it’s essential to consider how they might deal with confrontations by family members who disagree with their actions. Family members may try to take advantage of someone they know, making it uncomfortable for the trustee.
If your estate is anything but simple, you must also consider the heavy commitment of time and effort placed on a family member or friend. The added cost of a corporate trustee may be worth the cost, depending on the size of your estate and your family situation. Their ability to act as an impartial third party can make it easier on family members during a difficult time.
With your family legacy at stake, selecting the right person as a trustee is crucial. An excellent place to start is by consulting with your financial advisor. Understanding your financial and family circumstances puts professional advisors in a position to help you choose between an individual or corporate trustee. They could offer advice on which individual to choose or refer you to a corporate trustee.
Bottom Line
Executors and trustees are vital in ensuring your estate’s smooth and efficient disposition. If you’re like most people who combine their wills with a living trust or other types of trusts, you’ll need both an executor and a trustee—the executor to oversee the execution of your will and a trustee to manage and administer your trust. Choosing the right people to fill those roles is essential for your peace of mind.
Few people understand your financial and family circumstances better than your financial advisor, making them the ideal partner for assessing your needs and identifying the best approach to choosing your executor and trustee.ARQ Wealth Advisors has decades of experience helping clients plan their estates and leave lasting legacies. Contact us today at 480-214-9572 or online to learn how ARQ Wealth can ensure your wealth is used wisely and positively impacts future generations.
