Determining Your Intended Heirs and Beneficiaries

After you create a list of assets and heirs, you can decide how to divide those assets. Consider your family, including your parents, spouse, children, grandchildren, siblings, and perhaps also aunts and uncles, cousins, nieces and nephews, or more distant relatives. Think about whether you want to make gifts to friends or other nonrelatives. You may also decide to leave bequests to charities, schools, churches, or other organizations.

Even with this list in hand, you’re not quite done. You need to think about how your heirs may change over time, through birth, death, adoption, divorce, remarriage, or anything else that may happen in the future. You don’t have to write your estate plan to cover every contingency, but your forethought can help you create an estate plan that needs less frequent amendment. You will also have a better picture of what types of changes in your life will necessitate the revision of your estate plan.

Your estate will have bills and expenses of its own and has to repay your outstanding debts. Your trust will also incur expenses. Make sure that you provide sufficient money for those expenses, or your gifts to your heirs may have to be reduced in amount or sold so that your estate can pay those expenses.

You should include a clause in your will or trust distributing the residuary — anything that is left over after all specific gifts and bequests have been made. This clause will ensure that any gifts or bequests that are declined by an heir, or that lapse due to the death of an heir, are properly distributed. It will also prevent the need to have a court distribute what may be a small amount of money or an asset with limited value, with court costs and legal fees potentially exceeding that value.

Individuals

After you figure out who your heirs are, you need to figure what you want to leave to them. Ask yourself these questions:

How much do you want to leave to each heir?
Do you want your heirs to inherit equally?
Do you want your heirs to inherit immediately upon your death, or do you want to defer part or all of their inheritance to a later date?
Do you want to make any bequests conditional, such as requiring a child to marry or graduate from college before they inherit?
Do you want to disinherit any heirs so that they receive nothing under your will or trust?
What do you want to happen to your bequest if your heir dies before you or declines to accept it?

If you intend to leave specific assets to your heirs, you need to remember that the value of your assets may change over time. In some cases, the asset may be sold, lost, or destroyed before your will or trust is administered. You may include language in your trust that equalizes the value of specific gifts, such that a child receiving a less valuable gift will also receive a sum of cash. You can also give heirs a percentage of your estate instead of specific dollar values to help preserve your intentions in the event that your estate grows or shrinks in size.

If you want to keep an asset in the family, you should designate an alternate beneficiary just in case your primary beneficiary dies. For example, if you leave your daughter your grandmother’s engagement ring, do you want it to go to your son-in-law if she dies before you? Or would you prefer that it go to another child or to one of your grandchildren?

You may leave your household furnishings or other personal property to your heir without making an exhaustive list of everything you own. For example, you can leave your clothes to a specific heir or charity. Another option is to describe a mechanism by which your heirs will inherit personal property — for example, you could leave your children your furniture, but provide that they take turns selecting a piece of furniture until all of it has been distributed between them. If you provide for them to take turns selecting items, you should also either indicate who picks first or describe a technique, such as drawing a high card from a deck of cards, to determine who will be randomly selected to pick first.

To make sure that some heirs benefit from your request, you must engage in some extra estate planning. For example, your minor children will require somebody to manage their assets. One of your children may be bad with money, so you may want to create a spendthrift trust to prevent them from squandering an inheritance or having it taken by creditors. If you have a child or grandchild with special needs, you may need to create a special needs trust to allow him to benefit from your gift instead of the state taking it as reimbursement for the cost of public assistance.

You’re not limited to describing your heirs by name. You may also describe your heirs by class, such as “to my children” or “to my grandchildren.” Such language may help ensure that children or grandchildren born after you complete your estate plan share in an inheritance. Or, if you prefer, you can expressly exclude after-born children. You may also state whether you want adopted children or stepchildren to be treated as your children or provide for them separately.

State law restricts your ability to disinherit your spouse and may also restrict your ability to disinherit your minor children. You should expect that under state law, your spouse will have the legal right to an elective share of your estate, possibly including assets held by your living trust. If you leave your spouse less than that amount, your spouse can choose to take the elective share instead of your bequest. The consequence can significantly alter the distribution of your estate to your other heirs. Disinheriting heirs through a trust is easier than disinheriting them through your will.

Louisiana has an unusual set of laws described as forced heirship laws, which attempt to force you to leave certain minimum bequests to your spouse and children. Louisiana also limits the circumstances under which you can avoid the application of those laws. These laws can make it difficult to plan even a simple estate in Louisiana, unless your wishes happen to accidentally correlate with what state law requires. Most people will benefit from discussing these laws with a lawyer.

Institutions or charities

You may want to leave part or all of your estate to an organization that advances the public good or supports a cause you believe in. Subject to state law restrictions on disinheriting your heirs, discussed in the previous section, you are free to do so. Many charities and educational institutions offer model documents you can use to leave bequests to them.

Charitable giving may also help you avoid estate taxes. A bequest to a tax-exempt organization may provide your estate with a tax deduction.

You may also consider using a charitable remainder trust to reduce the size of your taxable estate or to help you avoid capital gains taxes. Typically, the trust is set up to provide an income for yourself while eventually making a gift to charity. The trust may also be reversed, providing an income to a charity from an asset that will pass to your heirs upon your death.

Other bequests

It’s your money, so for the most part, you can leave it to whomever you want. You can set up scholarships or memorial funds, support a public garden, or engage in other creative gifting.

You can also create a trust to benefit your pet. Yes, really. Pet trusts are not universally recognized as valid, although a growing number of states have passed laws making them enforceable. In states where they’re not formally recognized, try to choose a trustee who will carry out your wishes even though they’re not legally binding.

Estate Planning for Second Families

If neither you nor your spouse has children, estate planning for your second marriage is pretty simple. You simply execute new estate planning documents designating your spouse as your beneficiary. In some cases, you may want a more complicated estate plan, leaving some of your premarital assets to other friends, relatives, or charities instead of your spouse.

But if you or your spouse have children from prior relationships, things become a lot more complicated. And the complications compound if you later have children together. Here are some questions to think about:

Do you wish to treat all your children equally? Including your stepchildren? Including minor children, who must be supported during their childhood and who may need assistance with college costs?
Does your spouse want to treat your children equally with their own children?
Is your spouse younger than you? If you leave your estate to your spouse “for life,” how will your spouse’s age affect things when your children receive their inheritances?
If your spouse survives you, will your spouse’s estate plan include all your children, or will your children from your prior relationship be effectively disinherited?

You may feel 100 percent certain that your spouse “will take care of” your children and be comfortable leaving your entire estate to your spouse. Most of the time, your instincts will be correct, and your spouse will respect your wishes. But if your spouse chooses not to leave money to your children from the prior marriage or dies intestate, your children are effectively disinherited.

Start thinking about estate planning before you marry. You may find that you need a prenuptial agreement to keep some of your premarital assets from becoming part of your marital estate or subject to your spouse’s elective share of your estate. The elective share is the amount your spouse may choose to inherit under state law, and your spouse may exercise that right if your will provides for a lesser inheritance.

PRENUPTIAL AGREEMENTS

As you enter your second marriage, you may want a prenuptial agreement, but be afraid of how your prospective spouse will react to the idea. Another common concern involves the full disclosure of your assets to your spouse. You may not want to make that type of disclosure. Yet a prenuptial agreement may provide significant estate planning advantages. You can help mitigate worries by keeping the agreement simple or, particularly if your primary interest is in your estate plan, by including provisions that will provide generously for your spouse in the event of divorce.

Your prenuptial agreement will clarify what property, which of your assets, and which of your spouse’s assets continue to be separate property after you marry, including your interest in a family business. Your prenuptial agreement can waive the rights that you and your spouse have to take an elective share of each other’s estates. It will also provide for how property will be divided if you divorce and may limit spousal support.

Even without a prenuptial agreement, if you’re careful with your assets, you should be able to keep many of your premarital assets out of your marital estate. This separation is more difficult in community property estates, or if you use marital assets to make loan payments or to maintain or improve the premarital asset. Also, simply keeping your assets separate will not be sufficient to protect those assets from being included in your spouse’s “elective share” of your estate. Still, if you leave your spouse a greater inheritance than state law requires, it’s very unlikely that your spouse will instead choose to receive the elective share.

If you decide to use a prenuptial agreement, make sure that you introduce the idea well in advance of your marriage ceremony — at least several weeks in advance and preferably several months. You and your spouse should both have independent legal representation to help you understand the agreement. If you have significantly more money than your prospective spouse, you can pay their lawyer fee, but they should pick their own lawyer.

Giving your new spouse a life estate

A common tool used in estate planning for second marriages is the life estate. If you own your marital home as separate property, you can make your spouse a life tenant. Your children receive title to the home upon your spouse’s death. But a life estate may prove to be an imperfect tool:

If your spouse is younger than you, your children may be elderly by the time they inherit your home. As your home is usually the most valuable asset in your estate, this delay can mean that they inherit little or nothing during the years when an inheritance would be most useful to them.
A life estate can put your spouse in conflict with your children. Your children may believe that your spouse is neglecting the property. At times this is true, with your spouse failing to pay taxes or the principal portion of the mortgage, or failing to fix a leaky roof or other structural problem, putting your children’s inheritance at risk.
A life estate may not be consistent with your own wishes. For example, you may prefer that your home go to your children after your spouse remarries.

Even without a prenuptial agreement, you can help mitigate these issues.

If you can afford to do so, you can purchase life insurance for the benefit of your children. Although their inheritance of your house is delayed, they immediately get the proceeds of your insurance when you die.
You can hold the house in trust and provide for your spouse to reside in the house for a fixed number of years, perhaps five or ten years. After that period of time expires, the house is conveyed to your children.

Using trusts to hold your assets

Your living trust can be beneficial in directing your separate property to your children. You can also place some of your assets in an irrevocable trust for the benefit of your children before you remarry, but you need to be aware of gift tax consequences. (Estate taxes are discussed in Book 5, Chapter 5.)

A common estate planning tool for second marriages is the bypass trust, in which you leave a substantial bequest to your children. This gift takes advantage of your gift tax exemption, by keeping the gift out of your spouse’s taxable estate. It also permits you to provide income for the support of your spouse, while directing the principal of the trust to your children.

Another common estate planning tool for second marriages is the Qualified Terminable Interest Property (QTIP) trust, which is often used in conjunction with a bypass trust. You can use the bypass trust up to the amount of your estate tax exemption and then use a QTIP trust for other assets, which will be treated as part of your spouse’s estate, but which you may still direct to your children upon your spouse’s death.

More tools to consider

Some states permit contract wills, which can’t be changed after the death of the first spouse. However, this type of will can be unduly limiting, particularly if the surviving spouse remarries or has more children, and may complicate probate. Before considering a contract will, be sure you fully understand how the joint estate plan would affect you as the surviving spouse.

A more complicated estate planning tool that may be useful in second marriages is the Family Limited Partnership (FLP). You control the assets in your FLP while your children are limited partners who have an ownership share but no control over the assets. The FLP is often costly to create and comparatively burdensome to maintain.

Don’t forget to update the beneficiary designation for your insurance policies and retirement accounts. If you don’t, you may find that you leave a windfall to your ex-spouse instead of your current spouse and children.

Estate Planning for Your Business

If you own your own business or a share of a family business, your estate plan should include a business succession plan. A will isn’t enough, and your living trust is probably inadequate. Business succession is a complicated process and is usually best implemented over a course of years. If you’re a business owner:

If you’re active in your business, your succession plan should provide for the continued operation of the business in case of your incapacity or death.
Your succession plan should describe who will own your interest after your death and who will take over your management role.
You may also carry life insurance to help fund the continued operation of the business, to hire additional staff to perform the tasks you previously performed, or to provide a cushion for liability the business may incur as a result of interruptions in its services.
Your succession plan should be flexible enough that it can be adapted to the changing needs of your business as well as changes in your wishes and those of your heirs.

You need to be aware of possible estate tax consequences of business ownership. Your estate plan should anticipate the possibility that your business could fail upon your death but that when calculating your estate taxes the IRS may try to value your business as if it continues to operate. As part of your estate plan, you should document the factors that may limit the value of your business to a buyer or that may make it difficult to sell. That documentation will make it easier for your family to argue that, upon your death, the business had little or no value.

Many small businesses falter or fail when their founder leaves the business or dies. Sometimes this failure is unavoidable, particularly if the business is entirely dependent upon the owner. The nature of the business may make its value largely dependent upon the continued involvement of the owner, as with a law practice or dentist’s office, or the owner may operate the business in a manner that leaves it with little value to a buyer, such as by choosing to maximize short-term income and not investing profits back into the business. A good succession plan can help ensure that your business continues to function after your death.

Sometimes you will want to transfer business ownership or management to another family member, perhaps a child. Other times, you will want to sell the business to somebody outside of your family. Remember that it can take a long time to find a buyer for your business, and the buyer may expect training and support. If you intend for your business to be sold after your death, you should still implement a plan for its operation and management pending sale and for support of the new owner.

Inheritance of your sole proprietorship

When you’re the sole owner of your business and you want to leave it to your heirs, you need to consider many factors:

Who will manage your business? If one of your children is already managing your business, it’s easy enough to have your child continue in that role. But if not, are any of your heirs both willing and able to take over the business? If it’s necessary to hire a manager, who will make the hiring decision and how will the position be funded? How quickly can the new manager take over to minimize or eliminate any interruption in operations?
Will your death cause an interruption in the cash flow of your business? If so, you may want to purchase insurance to help your business maintain its liquidity.
Who will inherit ownership? Will you give the business to one of your children, balanced against bequests of other assets or life insurance proceeds to your other children? If you give equal ownership interests to your children, will you also give them equal say in the operation of the business? If so, by what mechanism will disputes between them be resolved?

DISCUSSING YOUR SUCCESSION PLAN

You may have a very clear idea of who will take over your business when you die and how your heirs will share ownership or management responsibility. But you need to talk to your heirs about your plans and make sure that you’re on the same page. A poor choice of manager, or conflicts between co-managers, creates a substantial possibility that your business will fail.

You may discover that the child who manages your business is losing interest in the business and intends to sell the business upon your death. If your child manager has grown your business, your child may resent the idea that ownership will be shared equally with her other siblings upon your death. Some children will threaten to quit if they feel that their hard work will end up creating a windfall for siblings who have their own lives and careers apart from the business.

You may be inclined to leave your children equal ownership and management roles in your business. Conflicts often arise between co-owners. For example, your children have different visions of how the business should operate, or one wants to invest profits in the business while the other wants to withdraw the maximum salary and dividends. Your conversation with your heirs will help you anticipate and plan for this type of conflict.

The FLP may be a useful tool in leaving your business to your heirs, while also possibly reducing its value for the calculation of estate tax. In a FLP, you retain control of your business as the managing partner, while transferring ownership of shares to your children. Your children are limited partners and thus do not have any say in your management decisions. You can use the annual gift tax exemption, presently $14,000 (in 2017), to gradually transfer ownership to your children while reducing your taxable estate.

Even if you choose not to implement a FLP, perhaps due to its cost or complexity, you may nonetheless use an annual gifting strategy to transfer shares of your business to your children. Annual gifts have an additional benefit, in that as your business grows in value so do the shares you have already transferred. If you wait until you die, today’s $14,000 gift may represent a six-figure increase in your taxable estate. Although your children will face increased capital gains tax if they sell the gifted shares, as opposed to getting a step up in basis when inheriting them at your death, the potential tax savings remain substantial. For more on estate taxes, see Book 5, Chapter 5.

You can also sell shares to your children during your lifetime, financing the sale with a low-interest promissory note. Similar to a gift, your children receive the shares at a much lower value than they’re likely to be worth at the time of your death. You may still implement a gifting strategy, using your annual gift tax exclusion to forgive part of the debt owed on the note.

Inheritance of your share of a business

Every small business with more than one owner should have a buy-sell agreement addressing the right to purchase shares from a partner who wants to leave the business, or from a partner who becomes incapacitated or dies. You probably don’t want a stranger buying or inheriting your partner’s interest, or exercising the proxy rights of an incapacitated partner and then trying to assert a say in how your business is operated. Without a buy-sell agreement, you may get exactly that or may give that “gift” to your partners.

If you own a share of a business, whether it’s a family business or a business you run with partners or investors, you face many of the same issues as with a sole proprietorship (see previous section). If you manage the business or have a significant management role, you and your partners need to plan for a successor manager.

A key difference is that your partners have an interest in how your shares are distributed. Some businesses have buy-sell agreements, detailing how shares are to be valued and when your shares may be purchased by the other partners. Depending upon what you and your partners decide:

The business may buy life insurance to help fund the purchase of a deceased partner’s shares.
The buy-sell agreement may provide for your partners to pay for your shares in installments.
Your partners can purchase your shares for cash, obtaining financing, if necessary.

The buy-sell agreement may be triggered upon a partner’s death or incapacity, giving your partners the opportunity to purchase your shares from your estate rather than having them inherited by somebody they would prefer not be involved in the business. You, of course, get the same benefit should misfortune fall upon one of your partners.

Appointing the People Who Will Carry Out Your Estate Plans

You may be used to taking charge of every detail of your life. But no matter how independent you are, you can’t administer your own estate. You have to get help from somebody else. So what do you do?

You seek out helpers who are trustworthy, responsible, and financially stable and who are young and healthy enough that they’re likely to remain both willing and able to manage your affairs after your death or incapacity. Your choice will usually be a person, but at times you may choose an institutional trustee or lawyer to administer your trust or will. The following sections help you make the right choices and choose helpers who will protect your estate and respect your wishes.

Choosing your personal representative or trustee

Your personal representative, also called an executor, is the person who manages your estate during the probate process. Your trustee manages the assets held by your trust. During the administration of your trust or estate, your trustee and personal representatives will be the primary target of anybody who is unhappy with your estate plan or the way it is being administered.

Whenever you choose somebody to assist with your estate plan, you should talk to her before adding her to your will or trust. This discussion isn’t a sales pitch where you’re trying to convince somebody to become your trustee. It’s more like a job interview, where you try to be absolutely certain that your candidate is trustworthy, reliable, and willing to perform a difficult job. Find out the answers to the following questions:

Does the person want the job?
Does the person truly understand how difficult it may be?
Does the person have the necessary knowledge and skills to fulfill her role?
Does the person have the time to perform her role?
Does the person live near you? If not, how much travel will be involved if she accepts the job?
Is the person comfortable interpreting your will or trust?
Is the person financially stable? Will she have any temptation to “borrow” money she’s supposed to safeguard?
Does the person expect to be compensated? If so and you wish her to agree to a particular rate or amount of compensation, is the compensation you’re offering acceptable?
Does the person understand your goals and wishes?
Will she stand up for your wishes, even if friends and relatives are pressing her to make a different decision?

Estate administration involves number crunching. Accountings must be prepared for a probate court and possibly for trust beneficiaries. There may be a lot of bills to pay and savings, retirement, and investment accounts to close out. Tax returns must be filed on behalf of your trust and estate. Your trustee may also be responsible for managing or leasing property and making investment decisions. Either your trustee or personal representative may have to liquidate estate assets — for example, to pay taxes owed by your estate.

Although it’s reasonable for your trustee or personal representative to hire professionals to assist with these tasks, you need to choose somebody who is comfortable working with numbers. Her math skills increase the quality of oversight of your assets and reduce the chance that your estate will unnecessarily incur expenses for professional services.

If your personal representative or trustee will take control of your business, be sure that she’s competent to manage your business affairs. Remember the recommendations for business succession planning, discussed earlier in this chapter in the section “Estate Planning for Your Business.” Don’t let your business falter or fail due to a lack of preparation for your death or incapacity.

SHOULD YOU CHOOSE COPERSONAL REPRESENTATIVES OR COTRUSTEES?

Sometimes you may have more than one person in mind to help with the administration of your estate. For example, one person may be very good with numbers but not have much time to devote to estate administration, while another may have ample time but be terrified of preparing accountings or tax returns. Perhaps you have two children and fear that one will resent the other if you designate one but not the other. A possible resolution is to appoint them as joint administrators of your estate.

There’s no limit on how many people can jointly administer your estate, although at a certain point, a saying comes to mind: “Too many cooks spoil the broth.” Don’t unnecessarily complicate the administration of your will or trust by appointing a panel of administrators. Also, as hard as it is to find a trustee or personal representative who is both qualified and willing, the more people you add, the more likely it is that you will end up including somebody who is not an appropriate choice.

The biggest concern in appointing more than one person as trustee or personal representative is that conflict will occur. Even if you’re sure that your choices will get along, include a mechanism for dispute resolution. Your dispute resolution mechanism may involve assigning tie-breaking authority to one person, providing for mediation or arbitration, or even tossing a coin or drawing the high card from a deck of cards.

One factor you may have in mind when choosing a trustee or personal representative is whether she’ll work for free. That expectation may be reasonable if your trustee or personal representative is a primary beneficiary of your estate or if your estate is simple. But working for free is otherwise a lot to ask of somebody. For a larger or more complicated estate, either task can become a part-time job and in some cases a full-time job. Compensation makes it much less likely that your trustee or personal representative will resent the job or will resign when she realizes just how much work is involved.

Choosing a successor

It takes two, baby. Or more. Your first choice as personal representative or trustee may not be able to fulfill that role for many reasons:

Your first choice may become ill or die.
Completing the tasks involved may take more time and effort than your first choice is willing or able to give.
Despite your prior discussions, your first choice may simply change her mind and decline the appointment.
Your first choice may not be sufficiently competent or capable and may have to be replaced by a court.

By designating a successor (or more than one successor), your trust or estate will continue to be managed by somebody you choose.

If the person you chose as trustee or personal representative becomes unwilling or unable to serve, unless you have designated a successor, the probate court will choose somebody to take over the job. The person appointed may be a complete stranger who has no familiarity with your goals and wishes and will charge fees that may significantly exceed what a friend or relative would agree to accept.

Discussing your estate plan with your helpers

After you have chosen your trustee, personal representative, and successors, you need to make sure they understand your wishes. You should sit down with them and have a conversation about your estate plan and goals.

Go over your will or trust and explain what each provision means. Encourage your helper to ask questions.

Finding Professionals to Assist You

The more complicated your estate plan, the more likely it is that you will require assistance when preparing and implementing your plan. Common situations in which professional assistance is recommended include

You’re planning for business succession.
You’re using estate tax avoidance strategies.
You’re doing estate planning for second marriages.
You’re leaving assets to a disabled heir who receives public assistance.
You’re disinheriting an heir.

If you’re doing anything unconventional with your assets within the state of Louisiana, you can easily run afoul of that state’s forced heirship laws. You should consult a lawyer to make sure that your estate plan is properly formulated and that it will be upheld by a court.

Getting help from a lawyer

Your first task in getting help from a lawyer is finding a responsible estate planning lawyer. Your ideal lawyer will be experienced not only with planning estates but also with planning estates that are similar to yours. Similarity goes beyond size and extends to similarity of assets. If you have a small business, you need a lawyer familiar with business succession issues. If you’re on your second marriage, need to create a special needs trust for a disabled child, or want to disinherit an heir, seek a lawyer who is experienced with those issues. You may want a lawyer who has probate experience and whose estate planning documents have stood up in probate court.

Easier said than done? Certainly. You won’t find that type of detail from a Yellow Pages ad, and if you call a law office and ask, you’re almost certain to hear that the lawyer you have contacted has qualifications that far exceed your needs (whether or not that is true). So what do you do? Try to get referrals from people you know who have hired estate planning lawyers. If you have an accountant you trust, request a referral. You can also interview members of the American College of Trust and Estate Counsel (ACTEC), using its online directory (available at www.actec.org).

Hiring an accountant

Just as when you hire a lawyer, referrals are very useful when you need to hire an accountant. Your friends, family, business associates, and your lawyer may have suggestions. You can also consult your state’s CPA Association. You can find a directory of CPA Associations on The American Institute of Certified Public Accountants website at www.aicpa.org/states/stmap.htm.

When you have selected some possible CPAs, you should interview them. Questions to ask include

How long have you been in practice?
What are your qualifications and credentials?
What is your experience with situations like mine?
Do you specialize in servicing people with situations like mine?
Will you personally handle my needs, or will the work be performed by somebody else within your office?
How much do you charge, and does that price include all costs and fees?
What services will I receive for that payment?

When you choose an accountant, consider the condition of the accountant’s offices. Are they neat and organized? That’s what you should expect. You can also rely on your instincts. Do you trust the accountant and feel comfortable with the idea of working with the accountant? If not, it’s a big world. You have a lot of other accountants to choose from.

Using professional trust services (institutional trustees)

Your first thought upon hearing the words institutional trustee is probably, “that sounds expensive.” The most common institutional trustees are banks, brokerages, lawyers, and trust companies. They typically charge annual fees between 1 and 3 percent of the value of the trust.

An institutional trustee is thus likely to charge more than a friend or relative who serves as trustee, and you can’t expect that an institutional trustee will waive its fees. Unless your trust is valued at $400,000 or more, using an institutional trustee is probably not financially prudent. In fact, many institutional trustees will decline to service smaller estates.

Using an institutional trustee provides the benefit that your trustee is likely to be in operation for the entire life of the trust. At the same time, responsibility for your trust may be handed off from employee to employee, due to staffing changes or employee turnover. You should inquire about continuity issues when you interview potential trustees.

You should consider having the trust periodically reviewed by a third party, to make sure that assets are being properly invested and maintained. This review adds an additional cost to your trust but helps protect your heirs from mistakes or misconduct. Your institutional trustee should carry insurance to protect you from losses resulting from any such problems.

An institutional trustee is likely to be objective when managing your estate. Except as clearly authorized by the trust, pleas from your children for the extra disbursement of funds will probably fall on deaf ears. An individual may be swayed by a family relationship or feelings of friendship. Similarly, while your children may decide that it makes no difference whether they spend the money that they’re supposed to hold in trust for your grandchildren, your institutional trustee will do exactly what you instructed and make sure that your grandchildren receive your gift. Your institutional trustee will also not go through a period of grieving after your death or shy away from recovering trust assets from your friends or relatives.

LOSS OF THE PERSONAL TOUCH

Historically, your institutional trustee may have been your small town bank manager who had worked in the same bank for many years and had a long-term personal relationship with you. The banking industry has evolved. Today, it’s exceptional to have that type of personal relationship with your banker.

Although a lack of relationship can help the trustee remain objective, the loss of a personal relationship may also affect your estate. Although each of a succession of professional managers may do a perfectly competent job, one may miss a pattern that may be obvious to a trustee who has managed your trust from its inception.

A story that may not be true, but is illustrative of the problem, involves a wealthy woman who created a pet trust for the benefit of her dog. The trust provided for the woman’s housekeeper to remain in her home and to draw a considerable salary to care for the home and dog for the duration of the dog’s life. She hired an institutional trustee to manage the trust.

A succession of employees of the trust company made dutiful inspections of the house at least once each year and confirmed that the dog was still alive. More than a decade later, when the dog would have been more than 20 years old, a newly assigned employee recognized that something was amiss. An investigation revealed that the dog had died. The housekeeper had purchased look-alike dogs and was on her third dog when her trickery was detected.

Institutional trustees are readily able to consult other professionals. While your individual trustee may struggle to find a lawyer or accountant who can give her advice on a minor problem, your institutional trustee can easily obtain advise from lawyers, accountants, investment professionals, and other experts. Also, even with staff turnover, the institutional trustee’s experience with trusts avoids the learning curve of an individual trustee who has little or no prior experience managing a trust.

Issues of self-dealing may arise with institutional trustees. The trustee may be inclined to invest the trust’s assets through the institution. You may want to mandate that part or all of the trust’s assets be invested through other institutions so that the trustee will make the most suitable investments instead of favoring his employer’s investment vehicles. For smaller trusts, some institutions will restrict investment options. Be aware of your institutional trustee’s practices before you choose it.

Planning Your Bequests

Calculating Your Assets