Natural Fiduciaries - certified public accountants and fiduciary duties

California CPA, Nov, 2001 by Michael B. Allmon

CPAs Should Carefully Consider the Pros and Cons

The roots of modern estate planning are embedded in fundamental human emotions expressed by the ancient folk tale of the grateful dead. The myth takes several forms within a number of cultures, but the gist of it is the yearning of people to show gratitude to those they leave behind after they die.

The grateful dead, as the story goes, are those who have found a way to leave legacy or tribute to their earthly friends who have helped them in life.

Of course, when you're dead, you actually have no control, so you select a proxy as executor or trustee--also flown as a fiduciary--to ensure that the value generated by your life energy preserved and your wishes for its distribution accomplished.

Unfortunately, the natural inclination to appoint family members or close personal friends as fiduciaries is often not the best instinct. Estate planners have seen families ripped apart and value lost because clients selected fiduciaries who have a direct interest in the disposition of their estate's assets.

That's why good advisers recommend that clients choose is interested parties, preferably financial or legal professionals, to fulfill fiduciary duties.

The Best Fit

CPAs fit the fiduciary role best because their backgrounds in tax preparation, a accounting and financial planning, as well as their excellent judgment and a natural aversion to risk, makes them prudent administrators.

These are important considerations for people who want to ensure that their estates or trusts will result in desired payout levels to heirs or beneficiaries. They understand that family embers or friends usually are ill-prepared to undertake these roles because of the complexities as well as personal interests that can cloud judgment.

Executors or trustees are fiduciaries--agents legally responsible for managing property for the benefit of another individual or a group. Their principal duties include marshaling and valuing assets, keeping those assets productive, paying the estate or trust's bills, preparing an investment plan (including an investment policy), and preparing tax returns.

CPAs excel in all of these areas. Still, a CPA shouldn't rush into accepting the role of executor or trustee without first considering the pros and cons.

In Favor

Here are some of the reasons CPAs make good executors:

Trusted Adviser: Clients usually see CPAs as their most reliable advisers. It's therefore a natural step for them to see CPAs as trustees and executors. Sometimes clients don't realize that their CPA can be a fiduciary. So as part of your "getting-to-know-you" routine, make it a policy to note that you can serve in this role should the need arise.

General Knowledge: Education, training and experience provide CPAs with the background to handle the financial duties of estate or trust management. But to be effective financial managers, fiduciaries shouldn't be too specialized in any one area. CPAs have the broad knowledge to know when they need a specialist to assist them as well as the experience to manage any conflicts that might arise.

Knowledge of Client's Situation: CPAs often know their clients' financial situations better than the clients do. That intimate knowledge means that CPAs can step into the executor or trustee role with little need to devote additional time to researching a client's financial status.

Ability to Handle Details: Keeping track of all the factors--from investments to disbursements--is a huge undertaking that few people can handle without becoming baffled. CPAS do this routinely.

Preparation of Financial Information: Fiduciary accounting requires that the executor carefully sort income receipts, principal receipts, income charges and principal charges as well as prepare the required financial reports. A CPA is a natural for this task.

Obtain Valuations: A CPA routinely works with valuation experts when a business is bought or sold or in estate planning. CPAs understand the valuation process, and some are even valuation experts themselves. Regardless, CPAs can offer valuation experts insights about a client's property that ultimately could benefit the client and his or her beneficiaries.

Disposition of Assets: CPAs often know their clients' wishes and can suggest when a proposed estate plan might not make sense. Clients usually want to be fair with their beneficiaries and want to make equal distributions to them. But fairness and equality aren't necessarily the same thing. This is especially true when dealing with family businesses and succession plans. As observers who are not emotionally involved in the situation, CPAs can provide objective advice.

Identification of Incentive Desires: Leaving too much to children too early can destroy their motivation. An estate plan could include provisions to distribute to children based on their performance. For example, if a beneficiary achieves a college degree, she could receive additional funds. Or the estate might match a salary beginning at a minimal level. CPAs often know if such options apply to a specific client and can discuss them with the client.