A professional or corporate fiduciary may be preferable to a family member or non-professional individual fiduciary due to the institutional resources backing such services. Corporate fiduciaries, such as banks and trust companies, typically must meet substantial capital requirements to serve as trustees. An attorney selected as a fiduciary, depending on the size and resources of his or her law firm, may have the firm's assets, inventory and malpractice or professional liability insurance coverages, in addition to the attorney's personal assets, should there be problems.
These client recourse protections are generally not available to non-professional fiduciaries. Moreover, if the professional or corporate fiduciary holds any estate or trust assets in a bank or brokerage firm, there may be insurance coverages offered by such institutions that protect the assets so maintained. An executor's compensation is generally charged as a percentage of the fair market value of the gross estate for federal estate tax purposes, including both probate and non-probate property.
The executor's compensation typically covers all of the executor's responsibilities, including overseeing asset inventories, addressing debts and claims, preparing tax returns, accountings and court filings, as well as marshalling, managing and distributing assets during the estate administration process. Investing liquid estate assets in appropriate government securities, money market funds or diversified mutual funds may be involved.
If a client prefers to have assets invested in a portfolio of individual stocks, bonds, hedge funds, venture capital, private equity or other complex investments, then outside investment advisors are engaged and the resulting investment fees are generally payable directly by the estate in addition to the executor's fees. In situations where an attorney acts as a co-executor with a bank, trust company or other corporate executor, the attorney's executor fees may be proportionately reduced to reflect shared roles, unless there are necessary, duplicate responsibilities or the attorney is asked to assume a greater executor role in the estate settlement than is customary.
However, unlike a Trustee, an Executor cannot begin acting until they first obtain a court order. By the way, when a person dies without a Will their probate estate can still be opened, but the person appointed to manage the estate is called an Administrator rather than an Executor.
It is the same thing, just different titles based on whether there is a Will Executor or not Administrator. Once the court grants the petition for probate, the court will issue an order and Letters Testamentary. The Executor can then gather the assets together and take all appropriate actions required to ready the estate for distribution to the named beneficiaries.
Of course, when an Executor is appointed, they, too, take on the duties and responsibilities contained in the California Probate Code for fiduciaries. In this sense, Executors and Trustees are similar. They both manage assets that belong to other beneficiaries, they both are subject to fiduciary duties and obligations, and they both will be paid for their work assuming they do not breach their duties. A beneficiary of a life insurance policy, annuity, or other benefit usually can claim funds under the policy on their own.
You can look into the existence of such benefits and inform beneficiaries about them, while explaining what they need to do to claim them. Read more here about the process of claiming benefits. The first step is to investigate all of the places physical and electronic where you might find assets and organize a worksheet that lists them for your reference.
This can be useful if you need to file a formal inventory with the probate court. You may need to retain appraisers to handle this process for complex assets. The process also involves identifying and valuing any debts that the estate owes. Once you have estimated the value of each asset and the overall estate, you will need to determine the ownership of each asset. This will help you decide whether an asset needs to be transferred through probate or whether it can pass through a separate process.
Read more here about taking inventory of an estate. As an executor, you need to make sure that the assets of the estate stay secure and properly maintained so that their value does not diminish sharply. You may want to consider opening an account in the name of the estate so that you can more efficiently handle income and bills on its behalf.
This can help you make sure that you keep your assets separate from estate assets, which is an important part of your duties.
Also, you should keep records of your activities to show that you handled assets prudently. You may need to act more conservatively than you would with your own assets, such as when you are handling estate investments. The process of managing assets can become complex if the decedent owned real estate or helped run a business. You should try to transfer assets such as these to their new owners as soon as possible. You have been placed in a position of trust, and there may be consequences for the betrayal of that trust.
Also, hiring a financial or investment expert does not relieve the committee members of all of their duties. They still have an obligation to prudently select and monitor the activities of the expert. Broker-dealers, who are often compensated by commission, generally only have to fulfill a suitability obligation. This is defined as making recommendations that are consistent with the needs and preferences of the underlying customer.
Instead of having to place their interests below that of the client, the suitability standard only details that the broker-dealer has to reasonably believe that any recommendations made are suitable for the client, in terms of the client's financial needs, objectives, and unique circumstances. A key distinction in terms of loyalty is also important: A broker's primary duty is to their employer, the broker-dealer for whom they work, not to their clients.
Other descriptions of suitability include making sure transaction costs are not excessive and that their recommendations are not unsuitable for the client.
Examples that may violate suitability include excessive trading, churning the account simply to generate more commissions, and frequently switching account assets to generate transaction income for the broker-dealer. Also, the need to disclose potential conflicts of interest is not as strict a requirement for brokers; an investment only has to be suitable, it doesn't necessarily have to be consistent with the individual investor's objectives and profile.
The suitability standard can end up causing conflicts between a broker-dealer and a client. The most obvious conflict has to do with compensation. Under a fiduciary standard, an investment advisor would be strictly prohibited from buying a mutual fund or other investment for a client because it would garner the broker a higher fee or commission than an option that would cost the client less—or yield more for the client.
Under the suitability requirement, as long as the investment is suitable for the client, it can be purchased for the client. This can also incentivize brokers to sell their own products ahead of competing for products that may cost less. If your investment advisor is a Registered Investment Advisor RIA , they share fiduciary responsibility with the investment committee.
On the other hand, a broker, who works for a broker-dealer, may not. Some brokerage firms don't want or allow their brokers to be fiduciaries. Investment advisors, who are usually fee-based, are bound to a fiduciary standard that was established as part of the Investment Advisers Act of They can be regulated by the SEC or state securities regulators.
The act is pretty specific in defining what a fiduciary means, and it stipulates a duty of loyalty and care, which means that the advisor must put their client's interests above their own. For example, the advisor cannot buy securities for their account prior to buying them for a client and is prohibited from making trades that may result in higher commissions for the advisor or their investment firm.
It also means that the advisor must do their best to make sure investment advice is made using accurate and complete information—basically, that the analysis is thorough and as accurate as possible. Avoiding conflicts of interest is important when acting as a fiduciary, and it means that an advisor must disclose any potential conflicts to placing the client's interests ahead of the advisor's. Additionally, the advisor needs to place trades under a "best execution" standard, meaning that they must strive to trade securities with the best combination of low cost and efficient execution.
While the term "suitability" was the standard for transactional accounts or brokerage accounts, the Department of Labor Fiduciary Rule , proposed to toughen things up for brokers. Anyone with retirement money under management, who made recommendations or solicitations for an IRA or other tax-advantaged retirement accounts, would be considered a fiduciary required to adhere to that standard, rather than to the suitability standard that was otherwise in effect.
The fiduciary rule has had a long and yet unclear implementation. Originally proposed in , it was scheduled to go into effect between April 10, , and Jan. After President Trump took office it was postponed to June 9, , including a transition period for certain exemptions extending through Jan.
Subsequently, the implementation of all elements of the rule was pushed back to July 1, Before that could happen, the rule was vacated following a June decision by the Fifth U. Circuit Court. In June , a new proposal, Proposal 3. It is yet to be seen if it will be approved under President Biden's new administration. For example, a situation where a fund manager agent is making more trades than necessary for a client's portfolio is a source of fiduciary risk because the fund manager is slowly eroding the client's gains by incurring higher transaction costs than are needed.
In contrast, a situation in which an individual or entity who is legally appointed to manage another party's assets uses their power in an unethical or illegal fashion to benefit financially, or serve their self-interest in some other way, is called "fiduciary abuse" or "fiduciary fraud.
A business can insure the individuals who act as fiduciaries of a qualified retirement plan, such as the company's directors, officers, employees, and other natural person trustees. Fiduciary liability insurance is meant to fill in the gaps existing in traditional coverage offered through employee benefits liability or director's and officer's policies. It provides financial protection when the need for litigation arises, due to scenarios such as purported mismanaging of funds or investments, administrative errors or delays in transfers or distributions, a change or reduction in benefits, or erroneous advice surrounding investment allocation within the plan.
In response to the need for guidance for investment fiduciaries, the nonprofit Foundation for Fiduciary Studies was established to define the following prudent investment practices:. The process begins with fiduciaries educating themselves on the laws and rules that will apply to their situations.
Once fiduciaries identify their governing rules, they then need to define the roles and responsibilities of all parties involved in the process. If investment service providers are used, then any service agreements should be in writing. Formalizing the investment process starts by creating the investment program's goals and objectives. Fiduciaries should identify factors such as investment horizon, an acceptable level of risk, and expected return.
By identifying these factors, fiduciaries create a framework for evaluating investment options. Fiduciaries then need to select appropriate asset classes that will enable them to create a diversified portfolio through some justifiable methodology. Finally, the fiduciary should formalize these steps by creating an investment policy statement that provides the detail necessary to implement a specific investment strategy. Now the fiduciary is ready to proceed with the implementation of the investment program, as identified in the first two steps.
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