The Essential Executor's Handbook: A Quick and Handy Resource for Dealing With Wills, Trusts, Benefits, and Probate (2016)
You: The Fiduciary
Afiduciary is anyone who undertakes a legal duty to act for another. This may be done by court decree (e.g., an executor) or it may be done by agreement (e.g., a trust agreement) or it may be accomplished merely by your consent to a nomination under a document such as a Power of Attorney or a Living Will. The fiduciary may be a natural person (i.e., 46 chromosomes) or corporate (e.g., a bank). But regardless of how you became a fiduciary, you must understand that it is a duty that should never be taken lightly as it requires that your every action be done with extreme care. In fact, you will be held to one of the highest standards of care the law can demand—if not the highest. As a result, you are exposed to extreme liability. And, let’s be perfectly clear about something else. It is no honor. It is work—lots and lots of work. You can feel proud later, when you have accomplished your task without screwing up.
As you may have gleaned from the previous paragraph, there are many types of fiduciaries. But for our purposes, there are just four: the Executor, the Trustee, the Agent under a Power of Attorney (also called an Attorney in Fact), and the Agent under a Living Will. You may be one or all of these, so it is important that you understand what is being asked of you in each case.
The Executor’s Role
Your role as executor will depend on whether there is a living trust as part of your decedent’s estate plan. (It is fairly common practice for estate planning attorneys to create a living trust as the main vehicle for managing and distributing the bulk of the decedent’s assets.) We will first consider your role if there is a living trust and then proceed to your role where no trust exists.
If your decedent had a living trust as part of a larger estate plan then you are executor of a pour-over will. A pour-over will has one beneficiary: the living trust. In short, the will is merely a device that sweeps up assets that have not made it into the living trust. You, therefore, are like a sheep dog. Your job is to round up the stray assets and get them where they need to go. But, remember, as we discussed earlier, an executor only has authority over probate assets. So don’t go trying to wrangle things that don’t belong to you.
Before you can proceed with your sheep-herding duties, however, you will first need the approval of the Probate Court. Just because the will names you as executor doesn’t make it so. Until one of the court clerks takes you through the qualification process, you are not the executor at all. Until that time, you cannot even tell anyone that you are the executor. At best, you are only the executor apparent. But don’t worry. If you are at least 18 years old and breathing, you will probably qualify as executor. And, as we shall see in a later chapter, your attorney will help you with the qualification process.
Once officially appointed executor, your first duty is to “marshal” the probate assets (i.e., your stray sheep). Once that is accomplished, you have the duty to keep those assets safe until they can be distributed to the trustee of the living trust. Now, according to the law of most states, safekeeping does not imply merely preventing the loss, destruction, or misuse of those assets. Rather, it implies all of that plus putting the assets to work. If, for example, your decedent had a large checking account that was earning no interest, you would move the money to a certificate of deposit or some other safe investment that was actually earning interest. On the other hand, you could also merely sign over the account to the trustee and be done with it.
In addition to marshalling and safekeeping, you will be required to sign an assortment of court documents. In most states, these are notice to heirs and beneficiaries, the inventory, and one or more accounts (or accountings). You may also be required to sign the decedent’s final tax returns, the Probate Estate’s tax returns, state death tax returns, and possibly, even the Federal Estate Tax Return.
When you are executor of a pour-over will, that is about the extent of your duties. However, if there is not a living trust and the will itself specifies who gets the probate assets, you are going to be responsible for tasks such as paying bills, negotiating debts, selling real estate, and distributing whatever is left to the beneficiaries in a way that makes them happy so they don’t sue you. You may also have all of these duties if there is no will at all and the court qualifies you as the administrator, because the administrator of a Probate Estate has the exact same job as an executor but without the impressive title.
The Trustee’s Role
If your decedent has a living trust, your duties are similar to an executor when there is no living trust. That is, you will have duties such as safekeeping assets, paying bills, negotiating debts, selling real estate, making distributions to the beneficiaries, as well as signing tax returns. What you do not have is an obligation to answer to a court. Accordingly, unlike the executor, you will not be signing any court documents. But, let’s look more closely at these duties.
Safekeeping: While the executor only has a duty to keep safe the probate assets, you, as trustee, must watch over all of the assets held in trust name when the decedent died as well as all of the other assets that may be coming your way. For example, the executor will be transferring all of the probate assets to you. Furthermore, the living trust may be the beneficiary of a number of assets from the Contract Estate, such as life insurance and retirement accounts. It is one thing to move some cash to a certificate of deposit. It is quite something else to file claims on a dozen or more small insurance policies and then, when the checks arrive, to put that money to work as well. And, as you will see in a later chapter, filing a claim on a retirement account has serious tax consequences and must be done carefully.
Paying Bills: If your decedent had creditors, they will probably be looking to the executor for payment. But when the estate plan consists of a living trust and a pour-over will, those creditors will probably be setting themselves up for disappointment since the executor will only have the stray probate assets. You, as trustee, will more likely have the ability to pay them. And while it can be entertaining to watch a creditor twist in the wind for a while, trying to determine who to harass, you should nevertheless take the high road and contact whoever makes a claim against the Probate Estate. If the bill appears to be legitimate, it should be paid.
Having said that, neither a trustee nor an executor has a duty to pay a debt that is not enforceable. So, for example, if a creditor is seeking payment for a credit card debt that was incurred a dozen years ago, chances are good that the enforcement of that debt is barred by your state’s statute of limitations. Anytime you are unsure about your obligation to pay, check with your lawyer first.
When a customer dies, most companies will first ask for payment of any debt the decedent owed (e.g., credit cards or service plans). If their request goes unanswered, they will usually employ the assistance of a debt collection company. The debt collector gets a commission for every dollar collected and is usually authorized to take less than the full amount in satisfaction of the debt. That gives you a degree of bargaining power. You may be able to satisfy the debt for as little as half of what is owed. However, not everyone is comfortable with trying to wiggle out of an obligation. Since it will be your lawyer doing the negotiating, you should make your feelings known.
Selling Real Estate
Trustees rarely sell securities without a very good reason. What they routinely sell is real estate. And, while that seems simple enough, you must always be conscious that some or all of the trust beneficiaries may not agree with your plans. They may disagree with the timing of the sale (e.g., sooner rather than later), the terms of the sale, the sale price in particular, or whether the property should be sold at all. You are going to have to broker an agreement among them before the mansion even goes on the market. If it later appears that you are going to have to deviate from that plan, you will need to get their unanimous approval for the change. Understand, of course, that you have the legal right to do what you think is best but it is tough to do your trustee job if you are always being addressed as “the defendant.”
Making Distributions to the Beneficiaries
If there is the legal equivalent of a mine field, this would be it. One never knows when a beneficiary is going to howl about who got what, when, and why. We will explore this problem in more detail in a later chapter. However, as a rule of thumb, make no distributions without first consulting your lawyer.
Signing Tax Returns
In a nutshell, you are responsible for what you sign. Even though your accountant and your lawyer will be preparing the tax returns, you will be the one audited. An argument that you were not the preparer will hold about as much weight with the IRS as a soaked tissue (single ply). Accordingly, review every return before you sign it.
The Agent’s Role Under a Power of Attorney
First things first. If you are settling a decedent’s estate, any power of attorney the decedent had signed in life is now defunct. All powers of attorney die with the person who made them. However, yours may be a case where no one has yet died, though death may be imminent. In such a case, you can use the power of attorney given to you by a “principal” to move assets into your principal’s living trust. You do this by deeding real estate into the trust name and re-naming bank and brokered accounts to the trust name. You can also use the power of attorney to change life insurance beneficiaries to the trust name and possibly change retirement account beneficiaries to the trust name, especially where the trust beneficiaries are minors and couldn’t legally accept anything paid to them directly.
What’s more, as in many cases, your principal has been disabled for many years. Laws have changed and you need to amend the trust to conform to the new law. You can use your power as agent to do that as well. Just two years ago, in Virginia, the legislature renumbered a large swath of the Virginia Code (i.e., Virginia’s statutes). Clients who were still alive but had become disabled conformed their trusts to this change by having their agents sign the conforming trust amendments.
Yes, a power of attorney would seem like a wonderful thing. Something to spruce up a trust in the eleventh hour. Unfortunately, I am not aware of any law in any state that requires any person or institution to accept your power of attorney. You will likely be told that the power of attorney is too old, not specific enough, or simply that the institution doesn’t recognize any power of attorney form but their own. It can be maddening. For this reason, your assistance as an agent under a power of attorney may be limited. Nevertheless, you have an important role in preparing the way for the executor or trustee. You may indeed have difficulty using your power to move assets into your principal’s trust, but there should be no problem with signing conforming trust amendments. Your request for moving assets into a trust may be rejected, but the financial institutions will at least explain the problem as they see it. Without the power of attorney, it’s extremely unlikely that they would even talk to you.
The Agent’s Role Under a Living Will
Living wills go by many names. Depending on your state, they may be officially known as Health Care Proxies, Powers of Attorney for Health Care, or Advance Medical directives. And they have evolved from simple, “just pull the plug” documents to a litany of instructions ranging from life support specifics to burial directions. Regardless of the name or complexity of the document, the agent’s role is to carry out these instructions. In the absence of a living will, the law looks to family to make the hard decisions. In other words, neither the executor nor the trustee has any say in the matter and so you cannot expect guidance from those quarters. But let’s begin by looking at the most common instructions that you will be asked to carry out.
Removing Life Support
In the vast majority of states, removing life support means just that. There is a device or devices that are keeping a person alive. This could be a respirator or cardiac defibrillator. It could be intravenous hydration or feeding tubes. Or it could be all of these things. If the living will instructs you to remove life support, it is directing you to request that the hospital remove these devices. But there are a number of factors to consider.
First and foremost, does the patient’s condition justify removing life support? In most states, the governing statute provides one or more threshold requirements. For example, in some states, the patient’s death must be imminent and there is nothing that can be done to change the prognosis. In other states, in addition to “imminent death,” the law may allow the removal of life support if the patient is in a “permanent coma” or a “persistent vegetative state.” Further, it is important to understand that the removal of life support is not the same as euthanasia. In the case of the former, you are simply removing the technology that is keeping the patient alive. In the case of the latter, you are taking an active part in ending life. The first is widely accepted; the latter is not. That being said, you should know that very few states do permit euthanasia. You will need to check with your lawyer regarding the laws of your state.
It is no secret that doctors and hospitals are risk adverse. That is, they wish to avoid any actions that may result in a lawsuit. As the agent under the living will, you help them achieve a level of security. Imagine a family that cannot even begin to agree on their loved one’s treatment. Who does the attending physician listen to? Who is in charge? Most states provide that, in the absence of a living will, there is a hierarchy of relatives who are in charge, usually beginning with the spouse and working on down from there. However, that is not always a reliable alternative. The physician and hospital will be looking to you, the agent named in the living will, to make the difficult decisions.
Most people wish to donate their organs if that would help someone else. But be careful here. Who pays for the procedure of harvesting a heart or a kidney? If the document is silent on this point, you can assume that the cost will fall on either the Probate or Trust Estate. It is also important that you know whether organ donation includes whole body donation. Most living wills specify what is intended, but the patient may have written the living will himself or copied it from one of the many misleading, dangerous, and altogether useless documents available online. As a rule of interpretation, organ donation means taking an organ. Whole body donation usually means donating the decedent’s remains to a medical school. However, it can also mean donating the decedent’s remains to one of the many criminal forensic projects created to study human decomposition. These studies establish a database that can aid law enforcement in establishing a time of death in cases of murder or accident.
Disposition of the Remains
If your decedent had a preference for a particular disposition, the living will should provide that. The two most common dispositions, of course, are burial and cremation. However, the decedent may have had something more unusual in mind. For example, it is possible to have your remains prepared for freezing and then submerged in liquid nitrogen. The hope is that, when a cure is found for whatever killed you, your body can be thawed, repaired, and sent on its merry way. (Vegas is not giving very good odds on the success of such a procedure.) Or perhaps your decedent wished to have some or all of his ashes launched into space. There is, or at least there was, a company that offered such a service.
Regardless of the method of disposition, however, remember that it must comply with all federal, state, and local laws. For example, burial is legal but burial in your backyard is usually not. Cremation is legal but, unless you own a licensed crematorium, doing it yourself is probably not. And as far as the scattering of ashes is concerned, that is almost never legal and is usually done under the cover of darkness. A client once asked me to rewrite his living will to specify that his remains be dropped on the home of his lifelong enemy. When I told him that scattering ashes from an airplane was illegal, he replied, “Who’s talking about ashes?”
Of course, it should go without saying that the role as the agent under a living will does not even begin until it has been determined that the patient cannot speak for herself. I once got a call from a client’s very angry daughter. She said, “You know that living will you prepared for my mother? Well it doesn’t work!” Feeling like I had suddenly walked into the middle of a Greek tragedy, I asked, “What has happened?” The daughter replied, “Mom is in the hospital and I demanded that she be removed from life support. But then the doctor asked Mom if that is what she wanted, and Mom said no. So they wouldn’t do it!” The lesson here should be obvious. Be careful who you pick as your agent.
Most, if not all, states allow for co-fiduciaries. That is to say, you can have two or more acting executors, trustees, or agents. It is even rumored that George Washington’s will nominated seven co-executors. There are advantages and disadvantages to such an arrangement depending on the type of fiduciary.
When an executor is from out of state (i.e., not the decedent’s state of residence), the Probate Court will usually require that the executor be bonded. And bonds can get expensive. However, if the executor is paired with another who is a resident of the decedent’s state, the bond can be waived. Unfortunately, co-executors usually must act in unison. After a few months of trying to agree on everything and to sign everything together, the bond may start to look like a bargain.
Trustees do not face a bonding problem, but there is still the problem of too many cooks and the ill-fated soup. The general rule is that there should never be more than one acting trustee. Anything else tends to slow the estate settling process. The same can be said of agents acting under a power of attorney or a living will.
The Appearance of Conflict
Whenever I give a lecture, I invariably get the following question: “If the will says that the estate is to go to Sally but the living trust says that the estate is to go to Sue, which one is controlling?” And, by now, you probably know the answer as well as I. There is no conflict because the will governs only the Probate Estate and the living trust controls only the Trust Estate. In fact, in the case of a pour-over will, the Probate Estate eventually becomes the Trust Estate.
The bigger problem, as I see it, is determining whether the decedent had intended for the will and trust to have different beneficiaries. If, for example, the decedent had written the will giving his fortune to Sally but later drafted the trust naming Sue as the lucky beneficiary, intending to disinherit Sally, there is no conflict over control but there is definitely an unintended result. That is, the Probate Estate will go to Sally even though that was not the ultimate desire. To avoid these sorts of problems, estate planning attorneys always draft a compatible will whenever they draft a living trust.
In the business of settling a decedent’s estate, four different fiduciaries may play a role: the executor, the trustee, the agent under a power of attorney, and the agent under a living will. Each has their own distinct duties and obligations. Any conflict that arises does so among multiple fiduciaries of the same type. The apparent conflict between fiduciaries of different types (e.g., executor and trustee) is usually an illusion grounded in the belief that there is only one estate. These duties and obligations carry massive liability and should never be taken lightly. Consult your lawyer anytime your course appears to be getting murky.
Things to Do
1. Review the will and trust to see what role(s) you have been assigned.
2. Select a co-executor if you are not a resident of the decedent’s state.