Managing the Beneficiaries, Heirs, Trustees, and Executors in Your Estate Planning Process

There’s a time bomb ticking in many Estate Planning process.

You likely won’t know if the bomb explodes. The bombs explode in many estates, however, and the only question is how big the explosion will be.

The “bomb” is the person, or people, you name to act for you. Whether they act during your lifetime or after, they often make or break your estate plan. They can determine the fates of family relationships and financial security. The problem is most people don’t realize the potential consequences of their surrogates’ actions and so don’t give enough thought to who is appointed.

There’s a fairly long list of people who might be empowered to act for you at different times. Here’s a list of the major potential surrogates:

Estate Planning Key Player #1

Agent: The person who acts for you under a power of attorney or advance medical directive is called an agent. The agent can handle any legal, financial and tax matters for you and, in the case of the advance medical directive, make medical and long-term care decisions.

Estate Planning Key Player #2

Trustee: Most people these days have one or more trusts. While you set some limits in the trust agreement, the trustee (or trustees) makes the final decisions about managing the investments, making distributions, paying taxes and other aspects of managing the trust. Even if you’re the trustee today, eventually you’ll have a successor trustee.

Estate Planning Key Player #3

Executor: This person manages and distributes your estate after you pass. The executor has the job of turning the wishes expressed in your will and other estate planning documents into actions.

Estate Planning Key Player #4

Social Security representative payee: Social Security will appoint someone to manage the benefits of someone who is incapable of doing so. It usually looks to family and friends to fill the role and acts after receiving a request or concern from a friend, family member, or professional adviser. The beneficiary can contact Social Security and ask that a particular individual be appointed. Social Security will consider the request.

Estate Planning Key Player #5

Long-term care insurance lapse designee: Most insurers now allow the insured to designate a lapse designee who will receive a notice if premiums aren’t paid. You also can designate an alternate payee who will receive and manage benefit payments when you aren’t able to.

Estate Planning Key Player #6

Agent for funeral decisions: States have different rules about who can make funeral decisions. Some states have laws recognizing the appointment of an agent.

Estate Planning Key Player #7

Financial account designees: Many people find it easy when opening a financial account to select the transfer on death (TOD) option or a similar choice. Or they open joint accounts with a relative or friend. The intent in these cases is to have someone in place to manage the account when you aren’t able and who will inherit it without going through probate.

The first problem with many of these surrogate designations is different people often are named for tasks and responsibilities that overlap. That’s particularly likely when you made the designations over a period of years and they were minor parts of other transactions, such as opening an account or buying insurance.

Having different people handling similar issues can be inefficient at best. It can be a problem when they don’t know or communicate with each other, and it can be a disaster when they don’t get along.

You need to work with your estate planner to ensure consistency and avoid conflicts between the different surrogates.

The second problem is people often are appointed without being asked or even told until they have to act. You need to be sure a person is comfortable in the role, is aware of it ahead of time and is able to handle it.

It’s not unusual for a person to appoint someone because he or she is a family member. But if the surrogate lives a considerable distance away and has family and job responsibilities, handling surrogate obligations well will be difficult.

The third and most important problem is the person named to handle these responsibilities might not be qualified. Sometimes the person doesn’t have the knowledge or ability to handle the complex tasks involved. Some people aren’t organized enough to manage their own affairs, let alone someone else’s.

Potential conflicts are another reason someone might not be qualified. You don’t want an executor or trustee who might have personal conflicts with someone who is likely to be a beneficiary of your estate. These personal conflicts often lead to disputes over how the matters are handled.

Here are some pointers for reducing problems with surrogate designations.

• Know all the surrogates you designated. Review financial accounts, insurance policies and estate planning documents to be sure you know who currently is named to the different roles.

• Understand the different roles. Some surrogate positions need a minimum level of financial sophistication and the ability to work with your lawyer, accountant and other professionals. The agent for your advanced medical directive needs to evaluate recommendations from medical professionals and make decisions about your care and treatment.

• Evaluate family members vs. professionals. Most people automatically appoint one or more family members to these positions. Family members are likely to be very familiar with you and the rest of your immediate family and know your history and goals. The same can apply to close friends.

There are potential disadvantages to family members as surrogates. Family could be too close or emotional to handle the job well. A family member also might have biases about other family members or unsettled disputes and grievances. Appointing one family member could offend other family members and cause conflicts. Of course, there also might not be anyone in the family who is capable of doing the job.

Professionals also have pluses and minuses. They bring experience and expertise. There also is likely to be an organization that can handle a range of issues, even those that weren’t expected. But professionals might not be very familiar with family history or dynamics or even interested in it. They also might not adapt quickly to changing circumstances. Of course, professionals will charge fees for their services, and substantial fees in some cases.

• Consider joint responsibility. One way to resolve the family versus professional issue is to appoint both. The trend is to appoint more than one person or entity to many of these roles.

For example, when a trust has money to invest and distribute, several different skill sets are needed. One skill set is to have custody of the assets, execute transactions, account for everything and file tax returns. The trust assets also must be invested; that requires different skills. Distributions to beneficiaries are a different area, and trustees often have some discretion. Making those decisions well requires knowledge of the individual beneficiaries, as well as your goals and intentions.

Because of the very different roles, many people now appoint co-trustees with each being assigned different duties. An institution, such as a bank or trust company, is named to administer the trust, keep records and file tax returns. An investment management firm can be named to manage the investments. Or a committee of family members and your professional advisers can choose investments and investment managers. Another group of individuals who know you and your family could determine the timing and amount of distributions.

Some of the positions are too small and discrete for multiple appointees. But executor, trustee and agent under a power of attorney are good candidates for co-surrogates who either act as a committee or have separate roles.

Appointing more than one person to each role also reduces the risk of fraud, abuse, embezzlement and similar actions.