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One need only look at the present amount of wealth stashed in personal trust funds — nearly $850 billion, or roughly one-half of the wealth in 401(k) plans — to confirm that the baby boomer generation will pass a staggering amount of wealth on to their children and grandchildren by means of such funds. It is no surprise, therefore, that the selection of a fiduciary — be it an executor or trustee — may be the paramount decision when establishing an estate plan as part of the overall financial planning process. And the planner’s ability to foresee and deal with issues involved in the transfer of wealth by means of a testamentary instrument may be even more important. So, who should be the fiduciary? The oversimplified answer is that a family member, financial institution, lawyer, accountant or some combination of these options will work best — provided the trust document is drafted properly. The correct answer, however, involves a thorough analysis of the client’s assets, family dynamic, tax considerations and a good old-fashioned dose of foresight. Closely held business The client’s ownership of a closely held business immediately triggers a number of issues that must be resolved in the selection of the fiduciary and drafting of the testamentary instrument. For example, is the business to be sold upon the death of the client and, if so, to whom? What is the sales price? Many times, the fiduciary will be beholden to an existing shareholder’s agreement or other succession plan. In the absence of such a plan, the testamentary instrument should provide the fiduciary with guidance on the sale of the business, including how to obtain the sales price and what parties, if any, should be excluded from the sales process. In addition, the document should address the financing of a sale, including direction on whether or not the fiduciary can accept installment payments or receive pledges of security. With respect to the sales price, the fiduciary should have the authority to retain appraisal services and should be given a safe harbor for selling the business within the appraised range. If the business is to remain an asset of the trust or estate, does the fiduciary have a conflict of interest with the business? It is not uncommon for a client to name a business associate a fiduciary in control of stock in a closely held business. Such a selection immediately brings forth issues involving conflicts of interest and necessarily implicates the fiduciary’s “unflagging and undivided duty of loyalty.” Fortunately, fiduciaries are not subject to the same conflict rules set forth for attorneys. With proper drafting, the client should acknowledge that a conflict might exist as a result of his selection of the particular fiduciary. The client, through the document language, should then provide guidance on those business issues for which the fiduciary is authorized to act or not act. To insulate the fiduciary’s decision, the client may also want to nominate a third party to intervene on particular business issues, such as the decision to sell or determine compensation. In no circumstance, however, should the language of a testamentary document create the possibility that a fiduciary is acting with an unrecognized conflict of interest. Diversification of assets A common underpinning to statutes and case law is diversification. In point of fact, the Prudent Investor Act imposes a duty upon the fiduciary to review the trust assets regarding a decision to retain or diversify within six months of receipt. It should be clarified, though, that these are default rules imposing a duty of care in the absence of specific instruction by the testator. As attorneys, we are taught to avoid the application of default rules whenever and wherever possible. The same teaching should hold true in the drafting of estate documents. If the client has sizable real estate holdings, sufficient inquiry should be made to determine if the client would want those holdings sold upon his or her death. The same inquiry should be made regarding closely held business interests. With marketable securities, a minimal level of planning dictates that the attorney advise the client of the Prudent Investor Act provisions, with an eye toward opting out of such provisions if warranted. Conversely, the client may want the securities immediately sold, notwithstanding certain tax elections for alternate valuation. In recent years, it has been the authors’ experience that the six-month diversification period set forth in the Prudent Investor Act has been used as a shield by fiduciaries who allowed stock portfolios to plunge without proper oversight. Thoughtful planning, including a mandate to liquidate certain assets within set time periods, could avoid such instances. The family dynamic It seems almost too logical to require a discussion, but estate or succession planning as part of a comprehensive financial plan must involve a review of the family dynamic. Which son is not in good graces? Which daughter-in-law is controlling? While these questions may seem improper or difficult to ask of the client, the failure to explore these issues places the fiduciary and the plan in jeopardy. Knowing the answers to these questions, by contrast, arms the planner with the ability to foresee potential litigation risks. In turn, the planner can arm the fiduciary with the proper testamentary language to address the family dynamic, including spendthrift trust provisions and trust protector powers. In situations where the estate plan calls for an unnatural distribution of the assets, such as the favoring of one child to the detriment of another, additional considerations in the drafting of the testamentary documents are required. For example, the client may execute a letter of intent — setting forth a detailed explanation for an unnatural distribution — in conjunction with the plan. Tax considerations A full analysis of the transfer and income tax considerations in an estate or succession plan is beyond the scope of this article. Nevertheless, tax considerations must be factored in to all decisions related to the selection of the fiduciary. Additionally, the scrivener must provide some level of flexibility when addressing taxation issues, mindful that gift and estate tax applications continue to evolve, subject to the legislative whim of changing administrations. A final word of caution regarding litigation fees: American jurisprudence has a history and public policy adverse to fee shifting in civil lawsuits. However, judicial exception has permitted fee shifting in a variety of circumstances. Additionally, fiduciary breaches that rise to the level of tortious conduct and that require corrective action necessitating the expenditure of court fees constitute damages that allow for fee shifting. The wrong selection of a fiduciary — or a correct selection that goes bad — creates risk to all, including the fiduciary appointed under an instrument of trust.

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