Financial advisor Mark Faiz Sakkejha received a painful reminder in 2012 that a financial advisor cannot act as executor of a client’s estate.
Faiz Sakkejha was fined $7,500 by the Mutual Fund Dealers Association of Canada (MFDA) and ordered to pay $2,500 in costs because, among other things, he had been appointed a “co-power of attorney, a co-trustee and/or an executor for four different clients.” And, in the case of one client, Faiz Sakkejha “had acted as the executor of the client’s estate.”
That activity violated MDFA Rule 2.3.1, which prohibits an approved person from accepting or acting upon a “general power of attorney or other similar authorization from a client.” And the activity breached the investment policies of IPC Investment Corp., for which Faiz Sakkejha was a sales representative and branch manager in Toronto. He also had blank signed investment instruction forms from clients in his files, which also is contrary to MFDA rules.
The infractions came to light during a routine field audit by IPC and led to a settlement agreement with the MFDA.
Both the MFDA and the Investment Industry Regulatory Organization of Canada have rules in place to avoid potential financial conflicts, as do most investment and mutual fund dealers, that severely restrict or prohibit advisors from acting as an executor. There are several disciplinary cases that touch on the matter.
Although you cannot act as your client’s executor, you can provide valuable advice to help him or her choose an appropriate person and avoid the minefield of potential problems that can arise in settling an estate.
Appointing an executor is one of the most important steps in the estate-planning process, says Howard Black, a wills and estates litigator in Toronto who mediates as many as 50 estate disputes a year.
“The choice [of executor] can often be the source of some form of litigation down the road,” Black says, “if that decision is not made carefully.”
Below are important points to consider when helping your clients choose an executor:
– Look for competence
An executor should be someone who not only is trusted, but also is smart and has his or her “head screwed on straight,” says Shelley Waite, a wills and estates lawyer in Calgary. An executor has to have the savvy to deal with accountants, lawyers and financial advisors and understand the information he or she receives.
Anyone overwhelmed by forms, reluctant to ask tough questions or with money-management challenges probably is an unwise choice.
– Consider the time required
Your client should ensure that the person chosen as executor will have the time to tackle the task, which can be both physically demanding when it comes to clearing out a house, for example, and time- consuming. Completing a simple estate can take up to two years, Waite says, and complex estates take much longer.
Leanne Kaufman, vice president, professional practice group, at RBC Wealth Management, a business unit of Royal Bank of Canada that provides corporate executor services, notes that administering an estate “is a massive undertaking and it’s a burden to place on individuals.”
– Consider emotions
Warn your client against underestimating the emotional element when a relative dies. That’s particularly important if your client is appointing a spouse or a child as executor. Will the executor respond objectively and deal with issues rationally?
Black likens some family dynamics to a stew cooking in a pot. Family conflicts may be simmering while the parents are alive, then become intensified by the death of the first parent.
“When the second partner passes away,” Black says, “the heat level of the stove turns up to high, the lid blows off and broth boils over the top.”
– Use caution when appointing children
Although parents often tell Black their kids will get along once the parents die, that has not always been the case in Black’s experience. He cites one dispute between two brothers, in which the younger brother accused the other of having taken advantage of him all his life (including the older brother holding him in a headlock and not letting him go at the age of six). The younger son was determined not to let his bother have the upper hand in settling the estate.
Black says that, after many years of dealing with estate disputes, he has developed a bias against appointing children as executors of a will in which they are beneficiaries. Clients who appoint their children risk pitting them against each other when making decisions and creating possible stalemates. Black suggests including someone who is independent as a co-executor in such estates.
As well, Black says, the will should have a mechanism to settle disputes that arise among executors, “so you don’t have to be running off to court and spending a lot of money on legal fees to work it out.”
Some clients erroneously think their death will reunite their family, according to Black. Some wills even have named as co-executor a child who has been estranged from the family for years.
“Why would you do that?” Black says. “That’s a recipe for disaster.”
– Beware the blended family
Although blended families are becoming increasingly common, they can complicate the estate-planning process. “The more complex the family relationship,” Black says, “the greater the need for careful planning to try to minimize disputes.”
Adds Kaufman: “Blended families create a very interesting family dynamic. Who is the right person that can straddle both sides of that blended family?”
Stepchildren can compound the potential for disputes among siblings. The solution in the case of blended families often is to look outside the family for an executor with an objective perspective.
– Consider age
If a client picks a contemporary as an executor, that person may not have the capacity to serve as executor when the time comes, and he or she may decline the appointment. Naming an alternative to step in, should the first choice be unavailable, also is important.
– Be mindful of geography
There are negative tax consequences to appointing a non-resident as executor. Moreover, regulatory rules may prohibit advisors from taking instructions from an executor who lives outside of the province in which the advisor is licensed to practice. “An advisor can run into some compliance issues,” Kaufman says.
– Legal ways to involve advisors
Although advisors face rules against acting as executor, that doesn’t mean you need to be cut out of the process entirely.
For example, Waite says, a client’s will can indicate the client wishes that the executor seek your advice as a financial advisor. In this case, you still would be required to act in the best interests of the estate and avoid acting for your own financial gain.
“The [client] may not be able to appoint the financial planner as executor,” Waite says, “but that doesn’t in any way limit the executor from going to the financial planner when they need a little bit of help.”
You also could give up the client and take on the role of executor, thereby extinguishing any possible conflict.
THE CORPORATE OPTION
Not all clients will be able to find an appropriate, capable executor among their family members and acquaintances. Clients who have conflict-filled family situations, few family members or complex estates might be advised to consider a corporate executor.
Corporate executors bring an independent viewpoint to a potentially flammable situation, says wills and estates lawyer Shelley Waite in Calgary. “They know what they are doing,” she says, “and have a whole gamut of professionals who can lend advice.”
Some clients might be taken aback by the fees associated with hiring a corporation to act as executor, says Howard Black, an estate litigator in Toronto. However, Black calls that concern “a bit penny wise and pound foolish,” considering the problems and expenses an effective executor can prevent.
Most corporate executors’ fees fall in the same range as fees that an individual executor is entitled to claim from an estate: somewhere between 3% and 5% of the value of the estate. However, Black says, corporate executors “provide a one-stop shop” – everything from locksmith and moving-and-storage services to estate tax returns and accounting-record preparation. Lay executors have to locate and hire people to do those tasks and end up spending money anyway.
Leanne Kaufman, vice president, professional practice group, with Royal Bank of Canada’s RBC Wealth Management business unit, which provides corporate executor services, says other advantages to using a corporate executor include errors and omissions insurance coverage, something that most individual executors do not have: “It’s a high-liability job.”
On the other hand, a corporate executor doesn’t make sense for everybody, according to Kaufman. This is especially so if a relative who is an executor is unlikely to charge the estate for their services. “As a general rule,” Kaufman says, “it might not be economically viable for estates worth less than $500,000.”
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