Is a Risk Management Plan in Place for Your Estate?

By Tim Whitty May 6, 2015

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Attorney, Paradigm Counsel

For business owners or senior managers of business entities, risk management is a common topic that demands considerable time and attention. Attorneys and CPAs are often called upon to offer expert guidance in mitigating risk and developing plans that take the guesswork out of responding to various scenarios. While its important to take care of a company and ensure its long-term viability for the sake of its employees and customers, its equally important to apply that same level of consideration, analysis and decision making to ones personal estate.

Nearly everyone maintains insurance to protect against liability issues and the loss of property, instituting policies for residences, automobiles, boats, airplanes, etc. Although the chance of a major event happening is unlikely, paying annual premiums to guard against potential risks offers some peace of mind. However, many do not make the same efforts to protect their personal estates in the event of death or disability.

Developing an estate plan is a highly individualized task, and its certainly not a time to turn to a one-size-fits-all solution. A plan will be driven by identifying assets and reviewing how each should be dealt with in the event of disability or death. A contingency plan in the event of disability may incorporate power of attorney or a revocable living trust, while a tailored estate plan, including a will, should dictate an individuals wishes upon death.

Deciding who should handle an estate or specific assets in either situation is just an important as the estate plan itself. It is very common for a spouse or family member to assume roles such as power of attorney, trustee or executor; although these individuals may be trusted, they may not be best suited for the demands associated with a trust or estate. If the spouse or family member has lacked the time or skills to be involved in the business, manage investments or handle the financial affairs during a persons lifetime, why thrust them into such a pivotal position upon a loved ones disability or death?

A family member unprepared to handle the complexity of managing a trust or estate often grows to depend more and more upon the attorney and/or CPA involved, which can increase the costs of administration. In addition, the grieving process may impact that individuals ability to focus on the necessary details.

In one instance, a business owner in a partnership passed away, and the buy-sell agreement provided that the surviving business owner could buy out the deceased persons interest upon death. The value of the business was to be based upon the last appraisal, which was to be done every five years. The buy-sell agreement also stipulated that the deceased persons estate could request an updated appraisal within 90 days after date of death; in such a case, the more recent appraisal would be used. For this situation, the appraisal was four years old, but the business had undergone dramatic improvements in recent years and increased in value. The surviving spouse failed to note the updated appraisal provision and sold the business interest at a much lower price than it merited.

Performing the duties of a trustee or personal administrator may place undue burden on a spouse or family member coping with loss. In addition, considering the issues and decisions that may impact multiple family members, the individual chosen as a trustee or personal representative could experience dramatically increased stress or a strained family situation with lifelong impact. The amount of time needed, the number of deadlines that must be met, and the expertise that may be required across a variety of different assets suggest that an outside professional fiduciary may be best suited to manage estate needs.

An alternative to appointing a family member to oversee estate matters is selecting a trusted corporate or institutional fiduciary. Some banks and financial institutions now provide fiduciary services through trust departments or wealth management departments. Such entities can provide independent, professional services as trustee or personal representative and are adept at navigating trust administration, estate and tax issues.

Business owners or managers might start by reviewing the fiduciary services offered through institutions with which they already enjoy a strong relationship, but it may be worthwhile to consider other options, as each organization will be different. When evaluating a potential estate planning partner, consider the following questions:

  • Are they locally owned and/or do they have local staff?

  • What level of involvement will a family have in discussions and decisions?

  • Is it possible to meet in person with the professionals who are involved and making decisions?

  • Is the department, and the institution it is associated with, large enough to have the resources and expertise necessary, without being so large that one becomes lost in the crowd?

  • Do the professionals involved have the necessary expertise and experience?

  • What is the departments experience and approach to dealing with the specific types of assets in an estate (real estate, closely held business interests, other unique assets, etc.)?

  • What is their reputation?

Another important consideration will be the cost of an institutions services and the impacts those costs will have on an estate. Fees for fiduciary services may be calculated as a percentage, an hourly rate or a combination of the two. Also, fees will depend upon the nature of the assets and the work involved.

Although there are costs associated with corporate or institutional agents, clients are afforded certain protections that do not apply if an individual assumes similar roles. Corporate and institutional fiduciary service providers must be approved by state or federal regulators, and they are typically subject to annual exams. Furthermore, their services and their clients satisfaction are overseen by senior management and the board of directors, providing a level of accountability.

Using a corporate or institutional trustee or personal representative of your estate is an important decision and must be made as part of an overall estate plan, a plan that should be as thorough and well thought out as a business risk management plan.

Tim serves as Senior Vice President and Senior Trust Officer for Washington Trust Bank, counseling prospective and existing customers across the Western Washington region on investment management, a wide variety of financial and estate planning matters, and probate and trust administration.

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