Time, money and family harmony are all at stake when the wrong decision is made.
The topic of estate settlement does not excite most people. Thinking about death is unpleasant, and the administrative aspect of what happens to your assets after you die seems secondary to much larger concerns, such as who should care for your children or inherit your money.
So, deciding whom to name as the executor of your estate is often an afterthought. The decision is made quickly, without a full appreciation for the task at hand and without a plan to revisit it. In some instances, it is put off altogether. This lack of attention can result in the wrong person serving in the role, and ultimately, financial waste and lasting family conflict.
To help you avoid these issues and pick the right executor, Wealth asked Stacy Singer, national practice leader for Trust Services at Northern Trust, to provide some guidance. Stacy has more than 25 years of trust and estate experience, including previously serving as the national director of Northern Trust’s estate settlement group. She has seen the significant difference that having the right executor – whether an individual and/or a company – can have for a family after the loss of a loved one.
Wealth: Estate settlement seems like a distant concern. Is that true? When should someone start thinking about selecting an estate executor?
Singer: The reality is that you should make this decision as soon as possible, because an executor can make a huge difference in carrying out your wishes and save your loved ones from unnecessary stress if something unexpectedly happens to you.
In practice, though, there are two points in life that tend to naturally coincide with this decision. The first is when parents have young children and become worried about who would raise them. The second is when people have aged, accumulated more wealth and become concerned about what will happen to it.
In either of these scenarios – but particularly the first – it can be problematic if the executor decision is made at the end of the estate planning process. For example, parents with young children meet with their lawyer, rightfully spend an enormous amount of time and energy making decisions about who will care for their children, and by the time the executor decision is broached, they are tired and less focused. Or in the second scenario, older clients focus on the distribution of their wealth instead of the administrative aspect of distributing it. This often leads to knee-jerk or default selections – perhaps the oldest child, a son, or split responsibility among children – rather than an appointment based on skill and capacity. Over time, as children age, this can result in family conflict as an older child is left in charge of making decisions for other adult children or the siblings disagree on how to make distribution decisions.
Wealth: How should someone select an executor? What criteria should be evaluated?
Singer: Selecting an executor is a two part exercise: First, decide if there is someone who can play this role for you, and second, evaluate whether a corporate executor might make sense. For the first part, consider the following:
Scope: What am I asking this person to do? How complex is my estate? Do I have relatively simple assets, or are my assets and tax situation more complicated? For wealthy individuals, the answer is usually the latter, in which case you need to consider if you are comfortable asking someone you know to take on this level of responsibility.
Skills and Capacity: What capabilities and capacity do the people around me possess? If your son, for example, doesn’t like managing his own finances, he probably is not the right person to appoint, even if you are very close to him. Or if you have financially savvy family members, what is their capacity? Do they have a busy career? Do they live abroad? Will they be raising young children, or do they care for a disabled child? Time is a critical consideration as settling an estate is a time intensive job.
Family Dynamics: What dynamics will this person need to manage? Do you have family members, including spouses and other in-laws, that don’t get along? Think about the Thanksgiving dinner table. If your executor sits at this table, will he or she be able to make objective decisions that impact others around the table? Or will you expose this family member to undue stress and conflict? Do not underestimate this challenge.
If no one passes through the above filtering criteria, it is time to consider the second part of the exercise: whether to hire a corporate fiduciary to fill the gaps. A corporate fiduciary, by nature, is impartial. The professionals involved do not care about Thanksgiving dinner. Likewise, they fill a skill gap and always have enough time, because estate settlement is their job.
Also, keep in mind that this does not need to be an either-or decision. One solution that is sometimes overlooked – but often best – is to name an individual and a corporate fiduciary as co-executors. The individual understands the family history and background, whereas the corporate fiduciary has the specialized knowledge and time to ensure your wishes are optimally executed.
Wealth: How much time does it take to settle an estate?
Singer: Time varies considerably depending on the complexity of the estate. Best case, the amount of work for a relatively simple estate results in a part time job for roughly six months. For a more complex situation – one with complicated or valuable assets, difficult beneficiaries or other complexities – you can reasonably expect an almost full time job for two to three years.
Take my own personal experience. I was the executor for my mother’s estate. It was very simple and not taxable, and I am an attorney who has more than 25 years of experience settling estates. Even in this scenario, it required roughly 10-to-15 hours most weeks for a solid four-to-six months. I don’t think most people understand it takes this much time. They realize they are asking a lot, but they have no idea how much.
Wealth: If you decide you need a corporate executor, how do you select the right one? What qualifications should you evaluate?
Singer: You need to find a company that has settled estates like yours, both in terms of size and asset types. There are many great corporate executors who handle $500,000 estates all day, every day. But these firms are not the right solution for a $15 million estate. Similarly, if you have assets that are difficult to value, they might raise issues with the IRS. You need a firm with experience anticipating what those issues are.
Fees matter, but they shouldn’t drive your decision. The amount of money a good executor can save you both in terms of time and better choices can far exceed the fees you pay. At Northern Trust, we have caught and fixed issues with tax elections or even unfiled tax returns that have saved our clients millions of dollars.
Wealth: Once you have selected an executor, how often, if at all, should you re-evaluate your decision?
Singer: I advise clients to look at their estate plan every three years rather than to wait for a catalyst. Pull out the cover letter from your attorney, flow charts or other documents, and remind yourself what choices you have made, including who will serve as your executor. Usually, your selection will still make sense, but sometimes it won’t. Maybe the person you named is experiencing an unexpected difficulty or has moved overseas. Circumstances change and your executor selection is understandably not always top of mind as life unfolds.
Wealth: To sum it up, what are three top considerations to keep in mind when making these decisions?
First, do not underestimate the time it takes to settle an estate. Understand that you will be asking your executor to take on the equivalent of a part- or even full-time job for an extended period of time.
Second, fully appreciate the potential for conflicts to arise. Using an extreme example to illustrate this point, I will never forget an estate I helped settle early in my career. The family spent hundreds of thousands on a box of plates that could not be worth more than $75 on eBay. Of course, the plates weren’t really what were at stake. It ran much deeper. Family dynamics and emotions are powerful and complicated. In addition to making the right executor selection, discussing your plans heads of time to ensure everyone is on the same page can go a long way in mitigating future conflict.
Lastly, do not misjudge costs. I often see clients who have selected an individual rather than a company with the belief that it will save money. But what often happens is that the individual ends up hiring a lot of people to help, mitigating or even exceeding what they would pay if they had hired a company to serve as their quarterback from the beginning.