Mar 19

Two Heads Are Not Always Better Than One

In my estate planning practice, I have frequently had clients who wanted to designate one of their children to serve as their fiduciary, but were afraid that they would hurt the feelings of the other child or children who weren’t nominated. For example, in the instance of a living trust, the clients would want to name one child as successor trustee, but were afraid that, in doing so, they would create the appearance of favoring that one child and thought that that might create dissension among their children after their deaths.

Often, such clients will ask to nominate several or all of their children as co-trustees. Almost invariably, I discourage them from doing that. While I also don’t wish to see any distrust or dissension among siblings after the parents are gone, there are problems that creating co-trustees or other co-fiduciaries can create.

Inconvenience

Often, when dealing with a bank, or while undertaking some other financial transaction or sale of real property on behalf of the trust, the bank or escrow will want to have all of the trustees sign the transaction documents. Where the children who are co-trustees live in different states, this can lead to delays and inconvenience in having to circulate the documents among all of the children for their signatures.

Confusion and Possible Litigation

More importantly, however, having co-trustees can lead to confusion. For example, when dealing with third parties, those third parties can never be sure if they need only deal with one of the co-fiduciaries, or if they need to have both of their agreement. And where two co-trustees cannot agree on whether to take a proposed course of action, that may lead to litigation in the probate court to try to obtain court approval for the intended action, or to prevent the other trustee from taking the proposed action.

Liability for a Co-Fiduciary’s Fraudulent Conduct

Worse yet, the breach of fiduciary duties by one of the trustees can be imputed under some circumstances to the other trustee, which can create serious legal consequences for the innocent trustee.

I am familiar with a current probate administration in Southern California where the decedents named two of their children to be co-executors. During the course of the estate’s administration, the daughter, who worked for some accountants and was thought to have greater financial experience, handled most of the estate’s affairs while the son stood back and allowed her to do so. Unfortunately for the son, however, during the months that the estate’s administration was being handled by the daughter, and unbeknownst to the son, the daughter misappropriated substantial amounts of money from the probate estate’s accounts. Many creditors, including taxing agencies, were not being paid. Moreover, in the midst of the estate’s administration, the daughter quit her position as co-executor and moved to a distant location. She refused to communicate with her brother to transmit to him even simple documents about the estate’s financial condition.

At the time that the son was required to report to the court on the financial condition of the estate, he had to disclose that his sister had misappropriated the estate’s monies. The court then surcharged both the sister and the brother over $140,000, which requires them to repay the estate the stolen funds so that the creditors can be paid off and to permit a distribution of the remaining assets to the other beneficiaries. Applying California Probate Code Section 9631(b)(2), the court reasoned that the brother had improperly delegated the administration of the estate to his co-executor sister. The court didn’t care that the brother had received none of the monies misappropriated from the estate by his sister. They were both liable as co-executors.

I surmise that the court’s decision in that case has now created some real dissension between these siblings, something that the parents probably wanted to avoid and what they could never have conceived with their decision to make their children co-executors.

What Parents Should Do

So, what should parents of multiple children do in nominating an executor or trustee in their estate plan? They should select the child that they believe will do the best job in serving as the fiduciary, whether as an executor or as a trustee. A fiduciary needn’t have any special fiduciary training; however, I do recommend to my clients that they consider naming the child who is most accustomed to working under rules and regulations, or the child who is accustomed to maintaining books of account in their professional or personal life. And, if there is any question about a child’s honesty or integrity, or if a child is having serious financial troubles of his own, then that child should usually always be avoided.

And, then the parents should talk with their children and tell their children that they have made a decision to select the one child as the fiduciary and to give that child their vote of confidence to the other children. If the parents truly believe that naming one child as the fiduciary will create dissension with the other siblings, then the parents should consider naming another family member or a friend. Or perhaps their trusted accountant. Or they can name a private professional fiduciary or a bank’s trust department as the fiduciary.

While the parents’ concerns about maintaining sibling harmony after their own deaths is admirable, those parents should consider other alternatives instead of naming two or more of their children co-fiduciaries because that can be a recipe for a real disaster.

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