One of the most important decisions in drafting a trust is who will act as trustee. The obvious choices are friends and family, but this may not always be the best choice.
Many advisors are adverse to advocating corporate trustees for several reasons; cost, turnover, and a conservative investment philosophy with potentially low returns. However, I think it is time to review the advantages of utilizing a corporate trustee, such as cost, competency, and ability to help with conflict among the generations.
Today, it is possible to negotiate trustees’ fees. Trustees are far more responsive today regarding the concerns about their fees than they were several years ago. They have instituted services that approach more of an “a-la-carte” standard rather than all-in-one, thus giving the ability to charge only for those services needed. The fee now depends on services selected, such as:
1) Custody,
2) Portfolio management,
3) Serving as sole trustee or co-trustee,
4) Monitoring outside managers,
5) Preparing tax returns.
It is not uncommon for a trust department to depart from its fee schedule taking into account the nature of the particular services it will be rendering. However, no matter how much negotiating you do, there is still going to be a fee, and this fee must be weighed against the reduced cost of an individual trustee.
Individual trustees may agree to serve for a nominal fee, but in most cases, lack the skills to manage the trust appropriately and are thus forced to hire others to carry out their trustee duties. Even though, it may look as though the actual trustee fee is a bargain, the entire cost may not be.
When an individual trustee, i.e. family member or friend, is named, in almost all circumstances, they will end up hiring professionals to help them. The cost of the investment manager, accountant, and lawyers often times neutralize the cost savings over the institutional trustee. I have found that it is often better to focus on the services that will be needed and then determine who will be best equipped to provide those services. If you treat the cost as your primary concern, then you may lose out by hiring a trustee who may not have the competency required to administer the trust properly, and thus will end up hiring professionals and increasing the overall costs.
Trusteeship is an extremely complicated task. The assumption is that anyone can serve as trustee. This assumption is made without realizing the serious and extensive legal responsibilities. Trustees are exposed to claims from beneficiaries and often individual trustees do not have malpractice insurance. Just because they are being paid a small fee, or are doing it for free, does not alleviate them from these claims. It is almost a crime to believe individual family members and friends understand how the law applies to them as trustees, yet it is their legal obligation to not only know but also understand.
Having a family member or friend creates another risk while the settlor is still alive. Many times, the trustee is nothing more than the alter ego of the settlor, doing whatever the settlor requests. This is not only a breach of fiduciary responsibility, but it may be a risk from a tax perspective. The IRS can claim that the settlor retained control over the trust property, which in turn could lead to the inclusion of that property in the settlor’s taxable estate, thus obviating the entire tax plan. In interviewing estate planning attorneys, I have found most indicate the primary area of trustee negligence is their failure to understand and comply with the complex tax rules.
It is almost inevitable that at some point in time, family and beneficiary conflicts will arise. Having an independent corporate trustee will enable them to act as an intermediary many times. Often, the corporate trustee can act as a positive influence because it is the duty to watch out for the interests of all of the generations. Typically when a friend or family member is the sole trustee, that trustee will have a close relationship with the senior generation. This can cause the younger generation to rebel against the trustee. At the senior generation’s passing – when cohesion is most needed in the family – the relationship with the family trustee becomes most tenuous. It is at this point when the younger generation will try to replace the senior experienced trustee with their own friends. Often this instability causes irreparable damage to the family relations and fortunes.
One solution is to name a corporate trustee at the time of the older generation’s passing. However, this may be the worst time to introduce an unknown trustee. It may only serve to increase the shakiness of the situation. From a timing perspective, the addition of the institutional co-trustee may not take effect immediately. Often this disruption must continue until the institution can qualify as trustee.
The use of a corporate trustee during the clients’ lifetimes will allow everyone time to become familiar and get used to working together. A big advantage is that it also allows time to change corporate trustees if necessary. One safeguard that I prefer is to allow the removal and replacement of the corporate trustee after the settlors’ deaths in the event the institutional trustee becomes unsatisfactory. A last thought is the use of a board of directors in family businesses. The institutional trustee can bring the wisdom of an outsider to the management team of the company. Having outside directors is one of the most important factors for the successful continuation of a family business from one generation to the next. This holds true for trusts, as a more objective professional with outside experience of other families is now sitting at the table. Lastly, the use of a good corporate trustee can act as a bridge for the family’s future. Today, when deciding who should act as trustee, do not discard the thought of a corporate trustee so quickly.