When it comes to your accumulated wealth and eventual death, you likely hear about the positions of ‘executor’ and ‘trustee’. While there are some similarities, there are important differences. But first, let’s explain the difference between the ‘plan trustee’ and the ‘successor trustee.’ Normally, as the owner of a Solo 401k, you are the plan trustee. The plan trustee decides how/when the trust funds are invested/allocated. The successor trustee is not typically involved with the day-to-day management of the Solo 401k.
Understanding Differences Between Beneficiary, Successor Trustee, and Executor
A successor trustee is a person that steps in to manage the Solo 401k when you pass away or become incapable of continuing as trustee of the plan. Often, their primary responsibility is distributing funds and assets. The successor trustee can be one of your beneficiaries, but doesn’t have to be. The trustee will have signatory authority over bank accounts and investments. The beneficiary will be the person to receive the assets/funds of the plan. Your plan can have many beneficiaries, but only one successor trustee. It’s important that your plan documents clearly and separately designate who the beneficiaries are and who the trustee is.
An executor has control over your entire estate after you die. This can include your Solo 401k and other assets, like your private residence. Your estate executor is responsible for guiding your estate through the probate process, if necessary. The probate process involves working under court supervision to a great extent. It also involves taking care of the IRS taxes after your death.
Your executor will identify and gather all needed information regarding your assets, debts, and liabilities. Typically, the executor works with your creditors to make payments and resolve debt, which may require liquidating some of your assets. The probate judge will review. Then, he or she grants permission to distribute your remaining estate to the beneficiaries you’ve named.
Your Executor and Trustee Can Be the Same Person
When it comes to managing your estate trust structure, there are several variations. There are advantages to having the same person act as both your executor and trustee. Firstly, estate costs decrease. Second, as long as your estate is not overly complex, having one person that understands the goals of both your entire estate and Solo 401k can streamline the probate process. Another cost savings can be when only a few parts of the estate are complicated enough to require the assistance of an attorney. Limiting an attorney’s involvement to only a few complications should be less than having them act as executor over the entire estate.
However, some situations create disadvantages if the same person acts as both executor and trustee. This may be the case if the estate or trust (Solo401k), or both, are complicated and will benefit from two minds evaluating options and making decisions. The same can apply if you anticipate that beneficiaries might dispute your estate and need a set of checks and balances. Having a separate executor and trustee is unlikely to streamline the process. Although, no single person will have full control over everything.
Having one or more people act as the executor and trustee is a personal decision that you need to make based on your situation and judgment. On one hand, having a non-beneficiary (for instance an attorney) make all the decisions can promote harmony between rivaling beneficiaries. On the other hand, it could result in conflict.
Splitting Executor Responsibilities is an Alternative
This is similar to having separate roles for the estate executor and Solo 401k trustee. Within the executor role, there can be even more variations.
The trustee will typically have full control over the Solo 401k, but that might not be the case with the estate executor. You might choose to divide executor responsibilities into different roles that are typically administration, asset management, and distributions. The administrator can be responsible for maintaining accurate documents and records along with preparing tax returns. This role often goes to a professional executor firm or attorney. Depending on your preference, the administrator may or may not have signature authority over the assets. The administrator then has no decision-making authority over distribution handling.
Future investment decisions are the responsibility of a co-executor. It could be a professional financial advisor, a beneficiary, or a non-beneficiary. This person might decide the best time to sell an asset, raise the rent on a property, or hire a property management company. The third responsibility for distributing the estate (assets and money) could go to yet another co-executor. Based on your judgment, this could be the responsibility of a trusted family member or friend. Either could be a beneficiary or non-beneficiary.
Of course, none of these options are likely to streamline the management of your estate when multiple people must share information, coordinate documentation, and make decisions. Still, one advantage is having a combination of professionals and people with a vested interest involved in the decisions. One criterium you might want to use is selecting people that work well with others.
You Can Also Build Flexibility Into the Executor Role
The above are only a few ideas for assigning the responsibilities of executors. You can structure it in any way that you think will work best. One thing to keep in mind. It may not be easy to find a professional executor willing to play a limited role and thereby limiting the fees collected. Your beneficiaries will always have the most at stake. Therefore, you may want a structure that makes it possible for the beneficiaries to change the executor.
Of course, removing and naming a new executor comes with a different set of concerns. Should one beneficiary be able to remove an executor, or should all have to agree, or should a majority be able to make the decision? With a complicated estate, how often should an executor be replaced if needed? The more this happens, the more it will cost the estate. And the longer it will take to settle everything.
If all beneficiaries aren’t happy, there is always going to the option of going to court to drag things out even further. But you still have options to minimize this risk. For instance, you can limit the removal of the executor to only once every two years. You could also instruct that if the beneficiaries can’t unanimously agree on a replacement executor, that a non-beneficiary select the new executor.
In general, the terms of the Solo 401k trust (listing beneficiaries and trustees) may supersede a will. However, it is recommended to plan estate planning and designation together. Always work with your legal counsel and/or estate planner to ensure your wishes are written down and clear for your heirs.
