When creating your estate plan, choosing the right person to manage and distribute your assets according to your wishes is critical. This person is known as a fiduciary and can be a family member, friend, or professional. While many people opt to choose a trusted loved one as their fiduciary, there are some situations in which using a professional fiduciary may be the better choice. In this guide, Trust & Will analyzes the advantages and disadvantages of using a professional fiduciary and provides guidance to help you decide which is the right option for you.
What is a Professional Fiduciary?
A professional fiduciary is an individual or entity that has been certified and licensed by the state to manage Trusts, estates, Conservatorships, and other financial matters on behalf of others. They are held to the highest standards of care and must comply with strict regulations and codes of ethics. Professional fiduciaries may include attorneys, accountants, Trust officers, and other licensed professionals.
Examples of Professional Fiduciary Duties
Here, you may be wondering what services a professional fiduciary may be able to provide for your estate. We have an in-depth guide on fiduciary duties here, and below you'll find a general overview of activities:
1. Trustee: Manages and distributes assets according to the terms of a Trust.
2. Conservator: Manages the financial affairs and assets of an individual who is unable to do so themselves, such as due to incapacity or disability.
3. Executor/Administrator: Handles the distribution of assets in accordance with a Will after someone passes away.
4. Guardian: Takes care of the personal and financial needs of a minor or incapacitated individual.
5. Agent under Power of Attorney: Makes financial decisions on behalf of an individual who is unable to do so themselves.
Possible Scenarios When a Professional Fiduciary could be Advisable
If many individuals choose to elect a trusted loved one as their fiduciary, when would someone opt to name a professional instead? Mentioned earlier, every estate plan is unique, catering to the circumstances of the individual including their assets, their wishes, and their family dynamics. (Not to mention state laws.) There are certain times when it's perceived as best not to rope in a family member for this important role. Here are some possible scenarios:
1. Complex Financial Matters: If the estate or Trust is large and has complex financial assets, it may be best to use a professional fiduciary who is an expert in wisely managing assets such as funds and investments.
2. Family Conflicts: In situations where family members do not get along or have conflicting interests, professional fiduciaries can help prevent disputes as a neutral third party and ensure fair distribution of assets.
3. Incapacitated Individuals: When an individual is unable to manage their own affairs due to physical or mental incapacity, a professional fiduciary can step in and ensure their financial needs are taken care of.
4. Constraints: In situations where the individual who was originally appointed as Trustee or Executor does not have the time or expertise to effectively manage the Trust or estate, a professional fiduciary can provide assistance and ensure proper management of assets.
5. Business Interests: If the estate or Trust involves complex business interests, a professional fiduciary with expertise in this area can help navigate these matters and protect the interests of the Beneficiaries.
Advantages & Disadvantages of Using a Professional Fiduciary
Next we will go over important considerations of hiring a professional fiduciary, including the known advantages and disadvantages.
There are several advantages to using a professional fiduciary, including:
Expertise and experience: Professional fiduciaries have extensive knowledge in managing financial matters and are well-equipped to handle complex situations.
Objectivity: Unlike family members or friends who may have personal relationships with the Beneficiaries, professional fiduciaries can remain neutral and make decisions based on the best interests of the Trust and its Beneficiaries.
Availability: Professional fiduciaries are available to handle financial matters at all times, even if the Trustor or their loved ones are unable to.
Continuity: Professional fiduciaries can provide long-term management of assets and ensure that they are distributed according to the Trustor's wishes, long after their passing. Long-term management of Trust funds may seem daunting or too complex for a friend or family member of the Trustor.
While there are many advantages, there are also some potential disadvantages to using a professional fiduciary that you should be aware of:
Cost: Hiring a professional fiduciary can be expensive, as they typically charge a percentage of the assets under their management or an hourly fee.
Lack of personal relationship: Unlike a family member or friend who may have a personal connection with the Trustor, professional fiduciaries do not have a personal relationship and may not have the same level of understanding or emotional investment in the Trustor's wishes.
Potential conflicts of interest: In some cases, professional fiduciaries may also act as service providers such as attorneys or accountants, which could create potential conflicts of interest.
Risk of fraud or mismanagement: There have been instances where professional fiduciaries have been accused of mismanaging assets or committing fraud. It is important to thoroughly research and vet potential professional fiduciaries before hiring them.
What to Look for when Choosing a Professional Fiduciary
Once you've decided to select a professional fiduciary for one or more roles in your estate planning strategy, you'll want to thoroughly research and vet the individual or entity you decided to go with. Here is our checklist of what to look for:
Experience and Expertise: Choose a professional fiduciary with experience and expertise in managing Trusts, estates, and other financial matters.
Reputation: Research the reputation of candidates by reading reviews or asking for personal referrals.
Fees: Discuss and clarify fee structures upfront. Find out if they charge an hourly rate or a percentage of the assets under their management.
Support: Select a professional fiduciary who is accessible and responsive for effective financial asset management.
Trustworthiness: Ensure the chosen professional fiduciary has a good track record of managing financial matters and protecting Beneficiaries' interests.
Compatibility: Choose a professional fiduciary you feel comfortable working with and who shares similar values.
Licensing and Credentials: Look for licensed and bonded professional fiduciaries with relevant credentials.
Specialized Services: Consider professional fiduciaries with special expertise in complex assets if needed.
Succession Planning: Ensure the professional fiduciary has a plan in place in case anything unexpected should happen, such as a succession or transition plan.
Conflict Resolution: A professional fiduciary can help resolve conflicts among beneficiaries.
Continuity: Ensures continuity in managing financial affairs even after the Grantor or Executor's death.
Alternatives to Using a Professional Fiduciary
If the potential disadvantages of using a professional fiduciary outweigh the benefits, there are alternative options for managing financial matters and ensuring that assets are distributed according to the Trustor's wishes. Some alternatives include:
Designating a family member or friend as the Trustee: This person would be responsible for managing assets and distributing them according to the Trustor's wishes.
Creating a Co-Trustee arrangement: This involves appointing both a professional fiduciary and a family member or friend to act as Co-Trustees, providing a balance of professional expertise and personal connection. This is not unlike appointing Co-Executors to your Will.
Utilizing a Trust protector: A Trust protector is an individual or entity designated to oversee the actions of the Trustee and ensure that they are acting in the best interest of the Trustor. This can provide an added layer of protection against potential conflicts of interest or mismanagement. You can think of the protector as a Trustee watchdog service conducted by another third party.
Establishing a Corporate Trustee: This involves appointing a Trust company or bank to act as the Trustee, providing professional expertise and accountability for managing assets and distributing them according to the Trustor's wishes.
Design Your Unique Estate Plan with Trust & Will
Should you use a professional fiduciary or not? This guide went over what professional fiduciaries are in estate planning, and several instances of when they may be a viable option. In most cases, estate planners will choose a trusted loved one to serve in a fiduciary role, such as a Power of Attorney or estate Executor. However, there are scenarios in which this may not be the best option.
Deciding which option is best for an individual or family will depend on their specific needs and circumstances. It is important to carefully consider all alternatives before making a decision, and seeking advice from legal and financial professionals can also be helpful in this process.
Ultimately, the goal is to choose a solution that will:
Honor your wishes
Minimize risks
Avoid conflict of interest
Manage assets effectively
Considering all these factors carefully before making a decision is crucial. If you do decide to go with a professional, be sure to go back to our checklist that contains our top tips on screening for your best candidate for this important job.
Also, don't forget to regularly review and update your estate planning documents. As time goes on, your personal goals and objectives can change, meaning that your estate plan should be updated to reflect those changes. Additionally, there can be changes around you, including family dynamics, finances, or even regulations that can impact your plan.
To make this process more seamless, consider using Trust & Will to keep your estate plan in top shape. Our interactive and intuitive platform will make it easy to establish, review, and revise your estate plan so you can have peace of mind that your assets will be managed and distributed according to plan. Find out how to get started here.
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Trust & Will is an online service providing legal forms and information. We are not a law firm and we do not provide legal advice.
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