Most individuals considering an estate plan automatically select a close relative as their financial fiduciary, but this two-part blog post examines some potential pitfalls of this approach. Although the selection of a close family member can be appropriate, there are specific issues and potential problems that should be considered before making such a choice. Part I of this blog focused on the impact of selecting a family member on family harmony while Part II focuses on other potential disadvantages to such a decision.
Other Disadvantages to Choosing a Family Member as a Financial Fiduciary
While the impact of selecting a loved one on family dynamics is the most apparent drawback of not using a professional fiduciary, there are other potential disadvantages. Whether the individual is appointed to act as a trustee of a revocable trust, the executor of a will (referred to as a “personal representative” in some states), or an attorney-in-fact under a financial power of attorney, there are a number of issues that need to be considered.
Competence Regarding Financial Matters: A spouse or adult child constitutes a common selection to act as a financial fiduciary, but either of these choices might lack the necessary experience and financial expertise. While many people tend to consider administration of a trust or estate as a relatively simple and low risk “family matter”, the administration process of a trust or estate can involve complex financial arrangements and decisions that a family member might be ill-equipped to handle. The selected fiduciary should be mature, relatively financially savvy, and capable of interacting on an amicable basis with other beneficiaries and family members. However, an informed decision on who to name as a financial fiduciary should involve a discussion with legal counsel regarding the benefits, costs, burdens, and risks associated with selecting a family member rather than a professional third party.
Lack of Objectivity: When a family member is designated to make estate and trust management and administration decisions, the appointed individual’s lack of objectivity can become a significant issue. Professionals like attorneys and financial planning experts do not have an emotional connection to the beneficiaries or a stake in the distribution of assets in an estate. However, a family member is in a position to be influenced by family friction and disputes. Since a spouse or adult child also will tend to serve a dual role as beneficiary and administrator or trustee, this also can create a conflict of interest that frustrates the intentions of the individual who crafts a will, trust, or financial power of attorney. The risk of conflicts of interest is even greater when the decedent has several prior marriages along with children and step-children from multiple prior relationships. An adult child or spouse might inappropriately wield his or her authority in a vindictive manner as recompense for real or perceived transgressions.
Insufficient Knowledge of the Law and Estate Planning Instruments: Family members are less likely to be well-versed than a professional fiduciary regarding relevant statutory and common law or compliance with the provisions of an estate planning instrument. Proper administration of a trust or financial power of attorney requires competence and knowledge in making and managing prudent investments. Estate or trust administration fiduciaries also must have a familiarity with requirements involving copies of estate planning instruments and mandatory accounting practices.
Time Commitment Issues: While professional fiduciaries can be expected to devote sufficient time to carrying out their duties, a family member often views accepting this responsibility as a “favor” to other family members. The family fiduciary can be hampered in performance of these duties by personal and business responsibilities. Administrative errors or an unintended breach of administrative duties can be costly and cause further friction between family members. If the family fiduciary is not consulting with legal counsel and/or professional financial advisors and/or tax experts, expensive mistakes are more common.
If you have questions about estate planning, estate administration, or the probate process, we welcome the opportunity to talk to you and answer your questions. We invite you to call the Kansas Estate Planning Attorneys at the Weber Law Office at (316) 265-7802 or to submit an inquiry form through this website to schedule your initial consultation.