ELITE ADVISOR BEST PRACTICES

What Is a Fiduciary Today?

The definition may surprise many advisors

By Marguerite Lorenz

Key Takeaways:

  • Incapacity, resignation and death are the three estate planning events that trigger a transfer of responsibility for a client’s financial and health care decisions.
  • Banks or trust companies are most likely to be selected as a client’s fiduciary if the client has no adult children.
  • Even if a client’s fiduciary is a close family member, that person should be compensated. He or she is taking on a big job, with significant liability.
  • As the financial advisor, you can help your clients create effective estate plans by assisting them in choosing the right successors, and then you can facilitate a smooth transition when the time comes.

Financial advisors are primary professionals for clients. Your clients share heartfelt concerns, family secrets, hopes and dreams with you, the advisor chosen to enhance and protect the wealth of today (and the wealth of the future). As the estate planning process begins, clients often rely on their financial advisor to guide and encourage them, because some families take a few months to get their estate plans completed and signed, while others take years. One of the common delays is deciding who will become the fiduciary, serving as trustee, executor, agent under the power of attorney for finance and agent for health care decisions. Should the fiduciary be you, a family member, the client’s bank/trust company or another professional? What is the best choice for the client sitting across from you? When will your client need the fiduciary to “take over”?

First let’s review the definition of a fiduciary today. If nothing else, a fiduciary is a person who stands in a special relation of trust, confidence or responsibility in his or her obligation to others. Outside professional fiduciaries can be hired to serve as trustee, executor, agent (power of attorney for finance) and often as agent for health care decisions. The professional fiduciary must put the trustor (the creator of the trust/estate plan) first and then consider the needs of the beneficiaries.

As you help your client begin the daunting task of updating his or her estate plan or putting a new estate plan in place, providing criteria for the selection of the fiduciary is a powerful tool in making sure you can continue to serve your client when incapacity, resignation or death occurs.

Below are some fiduciary selection criteria:

  • Objectivity – Can the individual selected to serve remain objective?
  • Keep in mind that the fiduciary may be serving during the life (and incapacity) of the trustor. If the fiduciary is also a beneficiary, what conflicts might come up that you, as the family’s chief advisor, can bring forward and clear up before the situation arises?
  • Intimate understanding
  • Parents don’t typically tell their children everything. Will the fiduciary have the opportunity to be successful and be able to ask your client all the necessary questions? These include tax, legal, financial, personal and medical questions.
  • Teamwork
  • What kind of negotiator/manager is the individual asked to serve in this high-liability job? Will that individual seek out the professionals whom the client already trusts, or will the new fiduciary change everything (potentially upsetting the client’s delicate life balance, achieved over many years and many relationships)? Too often I have seen amateur fiduciaries isolate the elder by eliminating longtime professional relationships.
  • Cost
  • There are, of course, fees involved in working with professionals, and you can help your client find out the specifics. What are the real costs of having family members, who may also be beneficiaries, take on the responsibilities of being the fiduciary? Will there be more conflict, or less? Family member fiduciaries should be compensated, as this is a big job, with high liability. The trustor’s needs must come first, and there are the other beneficiaries to whom fiduciaries have a duty to provide information. What will Thanksgiving be like once one of the siblings has the checkbook? Professionals may end up costing much less than a court battle for control would.

For more great questions to ask, no matter who is selected to serve as the fiduciary, click here.

When it comes to fiduciaries, adult children are the number one choice for most parents, followed closely by a bank or trust company. Some clients have no children yet still choose relatives (even ones they don’t know well).

What happens if the bank is chosen as the fiduciary?

Some banks and trust companies may continue working with the longtime financial advisor, but many do not. Your client may not even be aware of the big changes that may occur in his or her financial plans once that person has resigned or become incapacitated and the bank becomes the trustee. This is a great reason to ask to review your client’s trust documents so you and your client can discuss how this process works, and what can be expected. It is critical for you to help your client understand when the estate plan comes into play.

Three triggering events set the estate plan in motion, when your client is no longer the decision-maker and the successor takes over

The estate plan will have language that guides the transfer of responsibility from the initial trustee to the successor. When you see that your client is not up to the tasks of life management, it may be time to discuss the acceptance of circumstances and to help your client invoke the estate plan that was carefully prepared to handle this time of life. Giving up control is tough for all of us, but a smooth transition (with your help) can make life pleasant and joyful for your client and the rest of the family.

  1. Incapacity: Trust documents have a provision that details how incapacity is to be determined; obtaining letters from doctors who are unrelated to the client is a common method. It is critical for your clients to consider this possibility, especially if they feel strongly about staying in their home when they might need 24/7 care. This is when the trustee and the agents are making decisions about day-to-day life, and so much more.
  2. Resignation: When the client feels exhausted or not up to it, the drafting attorney can prepare a resignation. I recommend a visit with the attorney, because everyone wants to be sure the client is not being coerced, or unduly influenced, to give up control. This method of transfer to the new trustee also gives the client the opportunity to receive accountings and other reports from the new trustee to be sure things are being done the way the client wants them to be. The trustor, as long as he or she has capacity, can remove the trustee if needed.
  3. Death: When the first spouse dies, the widow/widower may be able to continue on as trustee, with your help. I have seen many surviving spouses resign as trustee after the death of the spouse who was handling all of the financial decisions, as their friends and family start pressuring them to move out of the family home. Your close relationship with your clients really makes a difference in the quality of life of the survivor.

As you know, a fiduciary must put the client’s needs before his or her own. The fiduciary standard makes it clear that suitability is not enough. If the adult children, who are often the beneficiaries of the trust, have conflicts of interest, are they the best choice to serve as fiduciary for their parents, living or deceased? If the only choice the client has is to select a beneficiary, how can the client’s needs and resources be handled with objectivity? The bank/trust company is focused on the financial aspects of the case. Who will make sure the client is living as best he or she can and that the client’s wishes are followed, whether the family likes it or not?

The estate planning attorney will ask your client questions you have probably already asked about family relationships and assets. The guidance you provide can make the difference between the estate planning attorney’s being just a document preparer or being a member of the client’s team. Many clients benefit (and the resulting plan is so much more effective) when the financial advisor and estate planning attorney communicate with each other. Although probate codes vary from state to state, the basic principles of good management hold true everywhere.

What is a professional fiduciary?

California is the only state of which I am aware that has licensing through its Department of Consumer Affairs’ Professional Fiduciaries Bureau. I am a California Licensed Professional Fiduciary (CLPF), and I have served a governor appointed term as a member of the Professional Fiduciaries Bureau, Advisory Committee. You can find the definition of Professional Fiduciary in the Business and Professions Code (California, Division 3, Chapter 6, Section 6500-6592). Please note that some states, such as Oregon and Arizona, have a form of registration and/or certification for Professional Fiduciaries. If you know of other states with a form of licensing, please let me know.

As a professional fiduciary, I serve as trustee, executor, agent (power of attorney for finance), and often, as agent for healthcare decisions. Named on their estate planning documents, before the crisis occurs, clients have an opportunity to learn about me and my firm, and I enjoy getting to know them. I continue my education, have specific tools and trained staff, and my firm is insured to do this work. There are approximately 800 licensed professional fiduciaries in the State of California, and their practices and service styles vary a great deal. For more information, you can visit the Professional Fiduciaries Bureau website – www.Fiduciary.CA.gov, or the National Guardianship Association website www.Guardianship.org

Conclusion

There is so much more to think about in one’s estate plan than the transfer of assets at death, and I encourage you to discuss your clients “Quality of Life” expectations; what will living at home be like if walking is difficult? Or your spouse is gone? I find that the families who have financial advisors who ask these kinds of questions, and more, are happier and healthier in the long run. Thank you for all you do for our mutual clients!


About the Author

Marguerite C. Lorenz, CTFA, CLPF #319: Since 2003, Ms. Lorenz has been a partner in Lorenz Fiduciary Services, Inc. (LFS), and has served as a Professional Trustee and Executor on over sixty cases. Ethics for Trustees, written by Jane and Marguerite Lorenz, gives further understanding to the work of a Fiduciary. Ms. Lorenz hosts the www.EstatePlanning101.org program in San Diego, which offers 12 hours of free estate planning education, sponsored only by charities. Follow Ms. Lorenz on Twitter! @SanDiegoTrustee