By: Katherine Szem, CLPF, CPA CFP, MS Tax
Please pardon the grammatical errors (“who” should be “whom” and certainly “trustee” is not a verb) in favor of a colloquially constructed question; however there are an increasing number of individuals and families asking this same question and getting very little help in finding an answer. The aging of America brings with it problems of transitioning healthcare and “wealthcare” decisions from an individual with declining capabilities to someone who is
trustworthy and will act on that individual’s behalf. Blended families add complexity to the mixture often rendering spouses, ex-spouses, children and step-children at odds and in conflict with one another. What are the chances of family goodwill remaining intact?
So let us assume that you have set up your living trust and everything is in good order. You are acting as your own trustee and the document identifies who will be your successor trustee when the need arises. Commonly, I have seen siblings, children, nieces, nephews, family friends, CPAs, attorneys, investment managers, trust companies and banks named. The purpose of this article today is to introduce to you an additional alternative, the private professional fiduciary, in particular the California Licensed Professional Fiduciary or CLPF. Here are the major reasons you would name a CLPF as your successor trustee:
- State licensure
- Service, independence and avoidance of conflicts of interest
- Expertise and competency
- Reduction of family conflict
- Ability to be trustee of business interests, real property and other non-investment assets
- Flexible fee structure
Similar to doctors, attorneys and CPAs, the CLPF is subject to governmental oversight by the Professional Fiduciaries Bureau and minimum competency requirements. The California Professional Fiduciaries Act enacted in July 2008 requires a person to be licensed if he/she has more than two non-family fiduciary engagements. In order to obtain the license, the applicant is (1) required to complete 30 hours of approved education, (2) undergo a felony and litigation background check and be fingerprinted, and (3) pass national and California-specific examinations. Once licensed, the CLPF must meet ongoing continuing education requirements and annually report back to the Bureau regarding assets under fiduciary supervision, cases assumed, cases ended, resignations, removals, felony convictions and disciplinary actions. This information is made available to consumers. See www.fiduciary.ca.gov.
To date, there are relatively few CLPFs – around 500 for a state with a population over 30 million. No private fiduciaries are grandfathered by the 2008 Act. All private fiduciaries must go through the licensing process unless otherwise exempted. It is very possible that there are unlicensed private fiduciaries continuing to practice. Thankfully, by using the state website, a family can easily confirm a fiduciary’s license status and oversight by the Bureau. In drafting or amending a trust agreement, be sure to require that any non-family, individual trustee be state licensed.
Service, independence and avoiding conflicts of interest
The CLPF’s job is to administer the trust according to its terms, the terms chosen by you. This obligation is prime focus of a CLPF’s attention. There are no distractions of a busy accounting, legal or investment practice. The CLPF is not attempting to fit responsibilities into the middle of personal and career obligations that a family member or friend would have to do. The CLPF removes the personnel turnover factor or the multiple layers of review and decision-making that are inherent in corporate trust and banking departments. Since the CLPF is required to operate as a sole proprietor with individual liability, the CLPF is independent of corporate agendas to utilize in-house services and products. Finally, the CLPF is required to adhere to the Professional Fiduciaries Code of Ethics disallowing conflicts of interest thereby protecting the public from self-enriching actions.
Expertise and competency
From both the health and the financial management perspectives, there is a considerable amount of technical knowledge and expertise required to successfully administer trustee responsibilities. Interacting with the Probate Court and knowledge of the Probate Code is critical for smooth administration. As complexity increases, the CLPF must bring additional skills to the table using experience, education and resources from an extensive network of professionals who are experts in their fields of endeavor. For example, as a fiduciary, I would not handle the investment portfolio personally. Rather, I would monitor the performance of an investment professional (RIA, CFA, CFP, etc.) who has developed and executed a financial plan that is compliant with the Uniform Prudent Investors Act and based upon the trust’s time horizon, cash distribution requirements for beneficiaries and the need to preserve principal.
Reduction of family conflict
This reason is so important that I cannot emphasize it enough. It may seem like a good idea to appoint a child as trustee or multiple children as co-trustees because of the existing personal relationships and assumed low or no cost for trustee services. Yet, time after time, I see family conflicts arise; conflicts that will never get resolved and in fact, may result in permanent family splits. The situation is ripe for un-appointed children to feel slighted and hurt, thereafter looking for ways to get their “fair share” or get even. Appointed children often feel offended when their actions are misunderstood and become resentful that the burden is on their shoulders, eating into their own time and personal resources. With family co-trustee appointments, disagreements can lead to a paralysis of action and the securing of attorneys and the Probate Court to settle matters. When blended families are involved, the risk of family conflict is amplified. It is more realistic to assume that personal feelings, misgivings and biases will prevail when the current interests of a step-parent conflict with the future interests of the remainder beneficiary children.
Ability to be trustee of business interests, real property and other non-investment assets
Trust companies and banking institutions are in the business of managing financial assets. Yet, individuals own more than just financial assets. Personal residences, businesses, investment properties, farms, collectibles, intellectual property are just a few examples. They may have established charitable foundations or remainder trusts. Corporate trustees will generally not accept engagements involving non-financial assets and special trustees for these assets must be appointed. A CLPF will be able to act as trustee and bring in specialized expertise where
Flexible fee structure
Corporate trustees will have fixed and published fee schedules for the services they provide. Attorneys, CPAs and Enrolled Agents will likely charge based on their current billing rates. Most investment managers prefer not to accept trusteeships because of the inherent conflict of interest in handling investments. CLPFs are independent of these constraints and can develop a customized fee schedule based on the assets in the trust. In the same engagement, if the trust owns an LLC interest as well as an investment portfolio, the fee could be arranged on an hourly rate basis for the LLC and on basis points for the investment portfolio.
Recommendations and Conclusion
As with any profession, there is a wide dispersion of skills and abilities among CLPFs. It is critical to match the skills of the CLPF with your family’s trust needs. It is best to take the time upfront to:
- Seek referrals from your estate planning attorneys, accountants and investment managers,
- although CLPFs are new to them as well as to the public, in general.
- Go to the Professional Fiduciary Association of California (“PFAC”) website (www.pfac-pro.org) to gain additional names, background, credentials and contact information for CLPFs within your geography.
- Ask for a copy of the CLPF’s license. Confirm that the CLPF is in good standing at the state website.
- Request and conduct due diligence on the CLPF’s resume and make sure to confirm any other credentials listed on the resume.
- Request and check out the references provided by the CLPF.
- Conduct a personal interview with the CLPF to make sure the chemistry is right.
- Ask the CLPF what backup plan is in place should an unfortunate occurrence render the appointed CLPF unable to continue serving as trustee.
- Ask for a sample engagement letter and fee schedule so that you can get a better idea of how the engagement will be administered and the cost structure.
- Make sure that your trust document allows a CLPF to be appointed and that you understand how that person may be removed.
I will conclude with a quote from the President of PFAC, Stella Svhil, JD. CLPF:
Fiduciaries play a unique and vital role in today’s society – serving everyone from our most vulnerable populations, (those who can no longer care for themselves,) to independent productive people who need assistance in making sound financial, health care and day-to-day decisions. Fiduciaries serve as a bridge between a client and his/her family, health care providers, caregivers and attorneys, while protecting both physical and financial interests.
Make your choice wisely so that you and your family are served in the best manner possible.