Fiduciary-Related Expenses Will Arise Whether a Professional or an Individual Is Serving as the Fiduciary

“Beware of little expenses. A small leak will sink a great ship.”

Benjamin Franklin[vii]

Because the duties of a fiduciary are so broad, it is almost inevitable that professional fees will be involved, even if a family member is willing to serve. Stand-alone investment management fees vary, but a reasonable estimate is 1% annual fees – just for management of financial securities. The individual serving as trustee will typically (and wisely) rely on legal advice in fulfillment of fiduciary duties. Further, expenses for retention of tax preparers, property managers, and other professionals, all may come into play.

Professional Fiduciaries with Limited Services Offerings

“Let our advance worrying become advance thinking and planning.”

Winston Churchill[viii]

Serving as a professional fiduciary is a challenging field involving multiple disciplines. Required areas of expertise include but are not limited to communication and people skills, administration, asset management (financial securities, real estate, entities, receivables, etc.), risk mitigation, taxation, operations, financial planning, marketing, and management.

The Limited Services Offering Fiduciary (“LSO Fiduciary”) represents a business model focused on providing only a portion of these services. In the LSO Fiduciary model, fundamental fiduciary duties may be shared with third parties, or outsourced entirely. In the right circumstance, there are attractive attributes to the LSO Fiduciary model, as (for example) it can allow a trusted investment advisor to continue to serve as the primary point of contact for family members.

The LSO Fiduciary model can present the perceived path of least resistance for estate planners and family members in what can be a difficult decision-making process.

The positive attributes come at a cost. For instance, these costs may be associated with conflicts of interest that may arise. The LSO Fiduciary’s ability to select an outside investment advisor creates a marketing opportunity – for the LSO Fiduciary. Close monitoring is important to evaluate whether the third party selected for investment management (or other outsourced services) by the LSO Fiduciary is the best choice for the trust or estate, or the best choice for the LSO Fiduciary.

An additional conflict of interest surfaces when the LSO fiduciary is introduced to the relationship by the investment advisor. The fundamental trustee duty of objectivity is at risk when the fiduciary is beholden to the investment advisor for a particular business opportunity.

Another potential cost comes from the overlay of fees. As noted previously, the outside investment advisor may charge 1% or more. Adding fiduciary fees for administration – which often include a billable hour component in the LSO Fiduciary model – can drive total fees significantly higher.

Next, the outsourcing of custody may present additional costs. An LSO Fiduciary may rely on a third party to have custody of financial securities. As such, assets will not be in direct control of the fiduciary. Outsourcing custody of fiduciary assets may lead to delays in cash movement, and delays in providing accurate accounting for assets.

A final word of caution: LSO Fiduciaries may lack basic expertise in investment management.  Lack of investment management expertise at the fiduciary level leaves assets at risk of idle management and could lead to inconsistent supervision of outside managers. 

The Intangibles of Tangible Personal Property Disposition

“Twice as much ain’t twice as good

And can’t sustain like one half could

It’s wanting more that’s gonna bring me to my knees…”

John Mayer[ix]

Many of us may feel the gravity of being weighed down by “stuff” – more formally known as Tangible Personal Property (“TPP”). TPP is property that can be touched, used, or consumed, and has intrinsic value.  Examples include clothing, vehicles, jewelry, business equipment, furniture, art, silverware, musical instruments, and books.

Disposition of TPP is typically addressed in an estate plan by reference to a writing separate from the will. Per I.C. § 15-2-513, “the writing must either be in the handwriting of the testator or be signed by him and must describe the items and the devisees with reasonable certainty.”[x]

In my experience, less than half of estate plans to be administered include a completed list for disposition of TPP. In post-death administration, it is not unusual to hear from family members that the decedent verbally promised them specific items of TPP. But if it isn’t written down, it typically doesn’t happen.

When an estate owns personal property of significant financial or emotional value, I encourage estate planning attorneys to assist their client in completing the disposition list for TPP. This can be a tremendous service to the family. For example, one memorable list was 115 pages long. This list was typed, signed, and included photographs as well as a brief description of each item and identified its intended recipient.  This saved the family significant heartache and disputes, as the decedent had a habit of verbally promising the same items to multiple family members.

Given the potential emotional impact of disposition of TPP, this area is ripe for litigation.  Family members may be more willing to fight for grandma’s wedding ring, or granddad’s vintage Martin guitar – so plan accordingly.

Managing Real Estate as a Fiduciary Is Not a Passive Endeavor

“Real estate is a contact sport.”

Tracey Hampson[xi]

It is inevitable that real estate will be a component – perhaps the primary asset – of many fiduciary accounts. This said, it is important to follow a discipline when onboarding and managing real estate.

The “Big 3” steps to be followed include inspection, valuation, and insurance.

The inspection may reveal structural imperfections that need to be addressed, but most importantly should be targeted to health and safety concerns. Recently a trust I was administering owned a house on the Boise Bench that as fiduciary we were preparing to sell. The professional inspection revealed many deficiencies, but most worrisome was an exposed wire in the basement. Cost-wise it was an inexpensive fix for an issue that (left unresolved) could have had disastrous consequences.

The next step to follow is valuation, which may include an appraisal. A fundamental fiduciary obligation is to account to interested parties. Defensible information as to valuation may be best obtained via an appraisal.

Finally, it is essential that adequate insurance coverage be maintained on fiduciary-owned properties. Clients are well-served to work with a professional fiduciary that offers a blanket policy for fiduciary-owned assets across all accounts. In the absence of a blanket policy, a professional fiduciary must maintain contact with multiple agents, track claims quality of multiple carriers, and deal with a multitude of different policy provisions, coverage limitations, and premium due dates.