In making a will, you must choose a fiduciary. At a minimum, you will need to appoint an executor. You may also need to appoint a trustee or a guardian. Executors, trustees and guardians are all fiduciaries, appointed by you to perform certain functions after your death.
Your executor is responsible for settling your estate. This means gathering together your assets, paying your debts and death taxes, and making distribution to your beneficiaries. In the meantime your fiduciary must keep property insured, decide what should be sold, invest cash, obtain appraisals and file income tax returns. This process usually takes one or two years.
A trustee's functions are similar to those of an executor, but instead of performing for a year or two, the trustee will manage assets over a long term, perhaps a lifetime or longer. Usually the trustee is managing cash and securities, but it may also control real estate or a family business.
The guardian is appointed to care for minor children, or for an incompetent. The guardian may be guardian of the person, guardian of the property, or both.
Usually the executor and the trustee will be the same persons. This is because the talents required are the same, and because property management is a continuous process.
The guardian need not be the executor too. In fact the care of children and the management of money may require two different types of person. A guardian is an individual who will provide a home, care and affection for children. Testamentary guardians do not normally control much property; the trustee is given that job. By contrast, someone applying to become guardian for an elderly person will usually be given responsibility for the person and the person's property.
Should your executor and trustee be an individual, or a bank trust department or a branch of your broker, mutual fund or life insurance company? Compensation should not be an issue, because individuals are entitled to be paid, just as corporate trustees are. Consider some of the following strengths and weaknesses:
Individuals may have an intimate knowledge of the family or of the family business. This may help to make a more informed decision, or it can result in emotion clouding the decision making process. Individuals may be more flexible or risk tolerant. Again, this can be good or bad. It may be wise to hang onto that real estate investment, or it may be best to unload it.
Individuals are mortal; they may not be around to finish to job. Individuals have their own busy lives to lead; do they have time for your business? Does this individual have record keeping skills, investment skills? Will the individual be fair to all beneficiaries? Will the beneficiaries accept this individual's decisions?
Corporate trust departments do not die, but they do experience personnel changes and budget cutbacks. They are excellent record keepers and they rarely miss deadlines. They are disinterested arbiters between competing beneficiaries. They do not steal. Should they make a mistake, they are able to pay for it. Trust assets are segregated, so that if the bank fails your property is not lost.
A frequent criticism of banks, as expressed by clients, is investment performance. Will they "dump" the family business? Why don't they invest more aggressively? The law encourages fiduciaries, corporate or individual, to invest conservatively, to preserve capital, to avoid risks. Thus they invest in "widows and orphans" stocks. And that is appropriate, because it is usually widows and orphans that trusts are designed to take care of. While an entrepreneur may be able to create wealth faster than a trust department, after that entrepreneur has died, the trust department, rather than spouse or child, may be the better choice to manage the funds.
A possible criticism of brokerage firms is that they are good with securities, but may have little interest in real estate or the family business. This may be a weakness of any fiduciary; real estate and businesses involve greater uncertainty and risk, and thus take more time.
Many clients decide to use both an individual and a corporate fiduciary, thereby using the strengths of each. Many clients also request a mechanism for removal and replacement of a corporate fiduciary, feeling that this solves possible problems of inattention in large institutions.
If you employ a corporate fiduciary, you may wish to discuss fees in advance. While fees tend to be similar, there may be differences, particularly if more than one service is needed.