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Estate planning can be a complex and emotional process. Ensuring that your family is secure and that the disposition of your will is carried out according to your wishes are key planning considerations for any individual. In addition, you should consider what would happen if you were to become incapacitated and unable to oversee your own financial and/or medical affairs. In both of these cases, you can name trusted individuals (or entities) to step in and represent your best interests and carry out your express wishes.
Executors play a critical role in executing your estate plan. The first and most important role of an executor is ushering a will through probate. Until this occurs, the estate cannot be settled and the assets are frozen. The Court first admits the will to probate and appoints the executor, who is responsible for gathering, inventorying and protecting estate assets, paying bills and taxes. The executor then distributes the estate assets to your named beneficiaries in accordance with the terms of your will.
Executors pay all outstanding bills due at death, as well as expenses incurred after death. The executor is also responsible for the preparation, filing and payment of tax due on the decedent’s final income tax returns and the Federal and State estate tax returns. (including fiduciary income tax) The executor may need to raise cash by selling assets. The executor must maintain records of every transaction that takes place in the accounts of the estate. Finally, the executor must see to it that estate property is distributed according to the specific terms of the will. If, instead of outright distributions, the will calls for one or more trusts to be set up, the executor distributes the appropriate portion of the estate to the trustee.
If you have created trusts as part of your estate plan, you will need one or more trustees to manage the trust assets. One of the trustee’s first responsibilities is collecting estate assets earmarked for the trust. Another is ensuring the safekeeping of trust assets. For instance, if real estate is a designated trust asset, the trustee is responsible for maintenance and upkeep, paying real property taxes, insurance protection and, if applicable, the collection of rent. For financial assets such as cash and securities, the trustee must maintain one or more separate accounts on behalf of the trust and is usually responsible for managing those assets.
A trustee should have a written investment plan that takes into account the needs and (sometimes conflicting) interests of beneficiaries — both current and future. Traditionally, trust investments were expected to generate income for beneficiaries who were entitled to distributions of net income, while the trust retained and reinvested principal. In some cases, the trustee may have the authority to make distributions of principal to beneficiaries. Today, most states have adopted rules1 which essentially permit the trustee to utilize modern portfolio concepts and manage the trust assets for total return. The trustee may then elect to make current distributions to the beneficiaries which permits them to participate in the overall total return while the balance of the principal continues to grow.2
The trustee is responsible for the payment of taxes owed on any undistributed trust income and/or capital gains realized by the trust. These are reported on the trust’s fiduciary income tax returns. The trustee also informs trust beneficiaries of the amounts they must report on their personal tax returns.
In short, the trustee serves as chief administrator — documenting every transaction that takes place in the trust accounts. Prior to final settlement, the trustee must demonstrate to the satisfaction of the remaining beneficiaries that all assets and income have been properly administered and distributed.
While you may choose a family member or friend to serve as your trustee, given the significance of the trustee’s fiduciary responsibilities, an independent professional is often the wiser choice. A corporate trustee can navigate complexities of trust management and estate settlement, bringing technical knowledge, tax planning expertise and continuity of service across generations.
Advance Directives — Naming Alternate Decision Makers
While the roles of executor and trustee come into play after your death, who would act on your behalf to manage your finances and/or make arrangements for your medical care if you were unable to manage your affairs on your own? In these cases, legal arrangements, called advance directives, allow individuals to name alternative decision makers to speak and act on their behalf.
Among the advance directives you may want to consider are:
Developing a personalized estate plan requires a structured approach that is consistent with your overall financial goals. Working with your attorney and other key advisors, I can work with you and your legal and tax advisors to help you create an estate plan that meets your needs.
Bruce Hemmings is a Financial Advisor and Senior Vice President with the Global Wealth Management Division of Morgan Stanley at Centerra. He can be reached at firstname.lastname@example.org or (970) 776-5501.
The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, Member SIPC, or its affiliates. Morgan Stanley Wealth Management LLC. Member SIPC.