Most estate plans are settled by non-professionals who are family members or friends of the decedent. These fiduciaries (executors/ trustees) were selected because they held the trust and confidence of the decedent and are likely familiar with the assets held within the estate and the family’s dynamics. What’s sometimes missed in these decisions, however, is whether the fiduciary has the time, interest or training to manage a complex project like this.

It’s rare that the fiduciary knows what their job is or how to do it. And this lack of familiarity with estate governance matters can lead to personal risks and financial responsibility falling upon the fiduciary. A CPA is uniquely qualified to take on the task of consulting to the fiduciary—given the proper background. 

Having served as fiduciaries, fiduciary advisers and expert witnesses on trust and estate governance matters, here’s a list of the most common risk mitigation strategies we’ve come across that the fiduciary can adopt to dramatically reduce their personal risk and support an efficient settlement process. 

The Governance Repository
A prudent fiduciary will develop a “Governance Repository” where all important documents, exhibits and communications are retained. To be sure, such a centralized repository will help foster an efficient settlement. But more than that, maintaining organized records is evidence that the fiduciary has acted prudently and in good faith. Generally, courts will judge the fiduciary not as much on the results of their actions, but rather on the actions especially from well thought out plans.

By maintaining a governance repository, the trustee is creating an evidentiary record of why-they-did-what-they-did-when-they-did-it. Failing to maintain this record of the administration would tend to undermine the fiduciary’s “good faith” defense, which can also defeat the support necessary to prevail in Court actions.

The Annual Account
A fiduciary is generally required to provide beneficiaries with an annual account upon each/any of the following events: 1) the change of trustee, 2) at least annually and 3) at the termination of the trust (California Probate Code Sec. 16062). Providing the annual account is perhaps the single biggest risk mitigation measure, and sadly, the most often overlooked by the trustee. It also tolls the statute of limitations in favor of the trustee.

Successor trustees, and their legal and tax counsel, may confuse the formality and cost of producing a “court accounting” (CPC Sec. 1060) with the fairly easy-to-produce “annual account” identified in Sec. 16063. The Annual Account does not need to adopt principal and income accounting, include a general ledger or detail of every transaction that occurred during the reporting period.

The annual account can be produced using the prior year trust income tax return and QuickBooks file. The trustee’s maximum exposure for actions questioned by the beneficiaries is reduced to three years by providing a timely Annual Account.

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Trustee Compensation
Most trust documents do not provide guidance for determining trustee compensation. Often trust documents simply say, “the trustee shall be paid a reasonable amount.” It’s our experience that whatever the trustee determines to pay themselves, the beneficiaries feel it is excessive—and the trustee feels it is not enough.

Fortunately, the California Rules of Court Rule 7.776 provides factors to consider when establishing what is a “reasonable amount.” Although the rule cites eight factors that indicate the compensation is reasonable, we will provide a few observations based on our experience:

1. A non-professional successor trustee should not expect to be paid as much as a bank trust company or other professional fiduciary to administer the trust.

2. A trustee with special skill, expertise or experience that directly relates to the administration should expect higher compensation than a trustee without these skills.

3. An hourly rate for a trustee is a reasonable approach for compensation if the trustee is efficient with their time and the hourly rate is not unreasonably high.

4. Where the trustee is a CPA or attorney with an established professional hourly rate, it is not always reasonable to rely on this rate. The issue turns upon what is reasonable for the trust to pay, rather than what rate the CPA serving as trustee routinely charges, unless the trust specifically allows the established rate.

5. The more risk that the trustee faces as part of the administration—multiple beneficiaries, complex assets, large values, pending or existing litigation, etc.—the more they should be paid. Fees early in the administration likely differ than those toward the end.

6. Many California counties—particularly in Northern California—provide guidance in the local rules of court as to what a “reasonable rate” is.

7. It is not necessarily true that if a 1 percent fee is reasonable for probate administration, then a 1 percent annual trustee fee is also reasonable. Probates need to be closed within a year, and the statutory fee for a personal representative in CPC Sec. 10800 is the total compensation to complete the probate and should not be read as an annual rate.

8. Our caveated rule of thumb—knowing nothing about the particulars of a case—is that a non-professional successor trustee can reasonably be paid about 0.50 percent of the trust estate on an annual basis, so long as the administration is not unreasonably delayed. This rate is simple to calculate and takes into consideration that additional fees that will be charged by the CPA, attorney, property manager, bookkeeper, investment advisor, appraisers, etc.

Dealing with Investment Advisors (Uniform Prudent Investor Act Compliance)
It’s not uncommon for frustrated beneficiaries to have overly optimistic expectations for the performance of the trust assets. We have been in more than one expert witness engagement where the beneficiaries have argued that the liquid assets in the trust “should have” had performance comparable to the S&P 500. We all know that a portfolio of 100 percent equities would be inconsistent with the trustee’s duty to balance risk expectations and return objective.

When the trustee delegates investment management authority to an investment adviser, the trustee is required to do three things: 

Act prudently in the selection of the adviser. The trustee is encouraged to document the reasons the investment adviser was selected. This does not mean the trustee needs to conduct a full-blown “Request for Proposal” from multiple advisory candidates or conduct “deep due diligence” on the adviser. Rather, it means that the trustee can’t just leave the money with the adviser that the decedent used simply because they are the incumbent. To be sure, the trustee may eventually select the incumbent adviser, but the basis for the selection must be “prudently made.” 

Act prudently in the delegation of investment duties to the adviser. It is prudent for the trustee to define a targeted long-term return objective and risk expectations for the asset management that is being delegated to an investment advisor (CPC Sec. 16047(b)). Most registered investment advisors provide their clients with an Investment Policy Statement (IPS) that documents these factors. When the “compliance department” for a large bank or other investment firm prohibits their employees from providing an IPS to the trustee, it will be necessary for the trustee to summarize risk and return objectives on their own.

Monitor the adviser’s performance against the delegated duties and objectives. A prudent trustee will not “set it and forget it” when delegating the management of trust assets to an investment adviser. It’s important that the trustee periodically review whether the manager accomplished the long-term return objectives with an acceptable level of risk.

Don’t Delay: The Orphaned Administration
Settling trusts and estates is complicated and often takes longer than it should because life happens—there are staffing issues and court dates and lost emails and vacation and non-responsive family members that delay the administration. But all of these legitimate factors fall on the deaf ears of the beneficiaries who are already spending their inheritance in their minds. A fiduciary who is inefficient in the management of the estate/trust settlement can raise the ire of beneficiaries who have unreasonable expectations for haste.

A prudent trustee will proactively and deliberatively move the administration forward. Sometimes this means the trustee requires performance dates on projects that are stuck on the CPA’s or attorney’s list. The squeaky wheel gets the grease; and if the wheel doesn’t squeak, the beneficiaries may hit it with a hammer.

Collectively, we in the trusts and estates practice, need to face an uncomfortable truth: Our most experienced colleagues are retiring and the attorneys coming out of law school are not clamoring to this practice. As the baby boomers age there is an increasing demand for estate settlement support at the very time that the supply of professionals who know how to do this work is shrinking. We need to learn how to settle estates quickly, at less cost and with lower risk. If we don’t, there could be more lawsuits against our clients—the executor and/or successor trustee—who unreasonably delayed the administration.

Closing Comments
Being a trustee or executor is hard. The beneficiaries’ expectations might be unreasonable; the professionals that the fiduciary relies upon could be harried and overcommitted; the rules are complex; and the trustee may not have the time, interest or training to do the job. As CPAs, we can step in and help them with this work while mitigating their personal risk.