When we prepare wills for clients, we are often asked about the difference between a personal representative and a trustee. Generally, a personal representative is tasked with preparing funeral arrangements, paying taxes and debts owed by the decedent and ensuring that the decedent’s wishes are carried out. Traditionally, a person that manages the affairs of an estate according to the decedent’s will is called an executor, or, in the female conjugation, executrix. In cases in which a decedent passes away without a will, commonly known as dying intestate, the person tasked with managing the estate is called an administrator or administratrix. Therefore, while a personal representative can refer to either an executor or administrator, the converse is not always necessarily true.
In contrast to the probate process, the manager of a trust is universally referred to as a trustee. A trustee is responsible for overseeing a trust and ensuring that assets are properly protected and invested. A trustee is often responsible for making decisions about distributing funds held in trust to the beneficiaries of a trust.
It is very common for spouses to appoint each other as personal representative, followed by their children, if they are old enough to serve. If not, another commonly appointed person is a testator’s (a person who signs a will is called a testator or testatrix) accountant. An issue often arises as to whether an accountant can charge his or her standard accounting fee if the accountant serves as personal representative and prepares a decedent’s tax return or provides other tax services during administration of an estate. Recent New Jersey case law and New Jersey statutes permit both. The statute allows a personal representative to receive a percentage of the probate estate as compensation for serving as personal representative and the statute permits reasonable compensation for services rendered in connection with or arising out of property defined in the statute, including tax services. A recent case also expressly permitted a CPA to serve as personal representative and charge a fee for preparing a tax return. In the case, In re Estate of Denora, 2012 N.J. Super. Unpub. LEXIS 2800 (App.Div. Dec. 24, 2012), the court noted that the statute explicitly allows additional compensation if tax services are provided.
Another issue that often arises is whether a financial advisor is permitted to serve as trustee of a trust in which the trust funds are invested with the advisor. If an investment adviser or a related person serves as trustee or personal representative of an estate, the investment adviser is deemed to retain “custody” of the assets. If an investment adviser retains custody of the assets, the advisor is required to retain an independent public accountant to conduct an annual unannounced audit to verify the existence of the funds in the trust, review financial reports and confirm that all trades were properly reported. The timing of these audits from year to year must be staggered and must be conducted at the advisory firm’s expense.
If an employee of an advisory firm serves as a trustee to a client of the advisory firm, the firm is generally deemed to have custody of the assets. However, the Securities and Exchange Commission promulgated an exception to this rule. If the employee has been appointed a trustee as a result of a family or personal relationship with the grantor or beneficiary of the trust and not as a result of employment with the financial advisor, then custody is not retained. Similarly, if an employee serves as a personal representative of an estate as a result of a family or personal relationship with the deceased, custody is not retained. However, if a personal relationship develops over many years due to the advisor providing long term services, it does not constitute a personal relationship that falls within the exception.
There are numerous exceptions to the custody rule that are implicated during estate planning. For example, different rules may apply if more than one trustee is appointed and neither trustee can act without the consent of the other or if a revocable grantor trust used. Additionally, from a practical perspective, many financial advisory firms and accounting firms have strict rules prohibiting advisors and accountants from serving as trustees and personal representatives because of a perceived conflict of interest. As such, it is often best to appoint a trusted family member or close friend as trustee or personal representative.
Michael Salad is an attorney in Cooper Levenson’s Business & Tax and Cyber Risk Management practice groups. He concentrates his practice on estate planning, business transactions, mergers and acquisitions, tax matters and cyber risk management. Michael holds an LL.M. in Estate Planning and Elder Law. Michael is licensed to practice law in New Jersey, Florida and the District of Columbia. Michael may be reached at 609.572.7616 or via e-mail at msalad@cooperlevenson.com.
Peter Fu is an attorney in Cooper Levenson’s Business & Tax and Cyber Risk Management practice groups. He concentrates his practice on sales and use tax, enterprise risk management, and commercial transactions. Peter is licensed to practice law in New Jersey and Florida. Peter can be reached at 609.572.7556 or via e-mail at pfu@cooperlevenson.com.
