Using a Corporate Trustee Should not be Summarily Dismissed
In meeting with clients to set up trusts that will control the disposition of assets upon their deaths, they will typically designate a surviving spouse as the successor trustee, and then often times designate children or other close family members as the successor trustee after both spouses have died. Without having much actual experience, they summarily dismiss the concept of appointing a financial institution as a possible successor trustee, citing concerns about too conservative investment philosophies or excessive fees as the reason. While there may have been some merit to these concerns decades ago, serious consideration should be given to the option of designating a financial institution as the successor trustee of your trust.
Before addressing the concerns about investments and trustee fees, let’s first consider some non-financial issues that should be taken into consideration when naming a close relative as trustee. As a caveat, if the assets of a trust are going to be immediately distributed outright to beneficiaries, it makes sense to name a trusted individual who can efficiently wind up the administration of the trust following the death of the settlor and distribute the assets either in-kind or sell the assets and then distribute cash. That said, what about trusts that continue for the benefit of a surviving spouse for his or her lifetime, or for children until they reach certain ages or even for their lifetimes? Some issues to consider when designating family members as trustee include:
- If the purpose of holding the assets in trust for a surviving spouse is to prevent the surviving spouse from redirecting the assets during the spouse’s remaining lifetime or upon death to a new spouse, does it really make sense to put the spouse in charge of the trust where there is no oversight by anyone?
- In a similar vein, if a child is named as trustee of his or her own trust, there is nothing initially preventing the child from taking the assets from the trust irrespective of whether the withdrawal would violate the terms of the trust. Will the next-in-line beneficiary who would be harmed by the excessive withdrawals even know about it? Even if the beneficiary does find out about the withdrawals, would he or she sue his or her father or mother to get the funds back (assuming the funds haven’t already been squandered)?
- If a child’s trust is being maintained to provide creditor protection for the child, and the child as trustee does not abide by the restrictive standards set forth in the trust for making distributions, a creditor’s attorney could make a cogent argument that assets in the trust have lost the protections the trust is supposed to provide.
- What will happen to the family relationship if one child is named as trustee of another child’s trust? The power one child has over a sibling’s trust assets could forever alter the dynamics of their relationship. The same might be true if an aunt or uncle is named as trustee.
Decades ago, bank trustees had a reputation of being overly conservative in the investment of trust assets in order to minimize the risk of loss. Most financial institutions with trustee authority now have wealth management departments that compete directly with investment companies in managing people’s wealth. The trust departments of these financial institutions typically use the same wealth management personnel for managing trust assets. They utilize the same modern investment strategies of asset allocation and diversification that any investment advisor hired by an individual trustee would use. Almost every trust agreement authorizes either the beneficiaries or some other trusted person to remove the currently serving trustee and to designate a successor trustee. If the investment performance of the originally named corporate trustee is lacking in any way, a new trustee can be appointed. Many trust agreements also include the ability to bifurcate the responsibilities for the investment of trust assets from the other administrative duties of the trustee, such as making distributions, notifying beneficiaries of the status of the trust account, and filing tax returns. Therefore, if the trust settlor or a beneficiary has a favored investment advisor, that investment advisor can continue to manage the investments while getting the benefit of professional administration of the trust.
The most common reason given for not wanting a corporate trustee is because of the fees charged by financial institutions. In reality, the fees paid to a corporate trustee will in all likelihood be lower than the fees that will be incurred if an individual is appointed as trustee. Unless the individual who is serving as trustee is himself or herself financially savvy and has extra time on his or her hands, he or she is going to pay for professional investment of the trust assets. Most investment advisors base their fees on a percentage of the value of the assets being managed, usually ranging as high as 1.25% to 1.5%. The greater the total value of the assets being managed, the lower the overall fee percentage that will be charged. The trustee also has the responsibility for filing tax returns for the trust each year, and will usually hire a certified public accountant for this purpose.
Most financial institutions have published fees schedules setting forth the fees they charge for serving as trustee. If you compare those published fee schedules to the fee schedule of your current investment advisor, you will see the fees are strikingly similar. The amount paid to the corporate trustee also typically includes the cost of the annual tax returns, or sometimes only a nominal fee is added for the tax returns. Just like investment advisor fees, corporate trustee fees can be negotiated. Factors that might be taken into consideration include the total assets under management (both trust and non-trust assets), whether there is a concentrated position that requires little management, or if investment responsibility has been assigned to another investment advisor and the trust agreement protects the trustee from liability for the decisions of the investment advisor.
If the reason for naming a trusted individual as trustee of a trust is because of the personal attention that person will bring to the trust administration, or because you really are not concerned about the risks associated with the trustee also being the beneficiary, then naming an individual trustee will make perfect sense. If, however, you like the concept of professional management of your trust, I suggest you not let concerns about investment performance or trustee fees dissuade you from designating a financial institution as trustee.
Keith D. Meyer