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Financial Planning > Trusts and Estates > Trust Planning

Helping Clients Choose A Trustee

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More financial advisors are turning to trusts to help their clients keep their assets intact and under the advisor’s management umbrella.

Trusts have come into wide use by middle-class Americans, but even a relatively small trust can pose a complex management challenge to someone who has no experience in such matters. Mistakes made by well-meaning but inexperienced trustees can undo all the careful planning that went in to setting up the trust.

Advisors can perform a valuable service for clients who want to establish trusts by urging them to retain a professional–or corporate–trustee. This can be a tough sell, depending on the client’s level of sophistication and their faith in the person they want to be the trustee. Here are some arguments you can offer in favor of putting clients’ estates in the hands of an experienced, professional corporate trustee.

The requirements

It takes education, experience and skill to manage a trust. It is a fiduciary responsibility, meaning the trustee is legally bound to manage the money as if it were his or her own. That includes:

? Interpreting a trust document from a legal standpoint.

? Meeting legal requirements for trust management.

? Investing or managing the assets, whether they are securities, real estate or a small business.

? Preparing periodic statements and, sometimes, reporting to the court;

Few individuals are experts in all of these areas.

With a corporate trustee, all the required services are consolidated in one professional provider. As mentioned above, an individual trustee likely would have to hire several professionals to handle various aspects of the trust. With a corporate trustee, all of those professionals–lawyer, accountant, asset manager, and banker–work together under one professional umbrella.

The trustee must be impartial. Trusts may identify current beneficiaries who receive income from the trust today, and remainder beneficiaries who receive the remainder of the assets after a certain period or after the current beneficiaries die.

Decisions about distributing and investing assets must be made in a way that is fair to all the beneficiaries over time. A friend or family member may find it difficult to be impartial, but a corporate trustee is not influenced by personal relationships with the beneficiaries.

Appointing a corporate trustee preserves family relationships. A trustee must interpret the document strictly and follow instructions exactly. Sometimes, the trustee has to tell beneficiaries they can’t have what they want, which can be difficult to do if a beneficiary is a member of the trustee’s family.

Corporate trustees seldom incur unexpected costs for routine administration. Sometimes the objection to using a corporate trustee is that it charges a fee, usually 1% to 1.5% of the value of the trust per year. A family member or close friend would charge very little, if anything.

But that private individual will have to pay fees to an attorney, a professional asset manager and an accountant to appropriately and legally execute the trust. Those services are included in the corporate trustee’s fees. Additionally, because they do not rely as heavily on the courts to interpret trusts, corporate trustees are less likely to incur court costs and associated attorney fees.

Corporate trustees are regulated by federal or state agencies. The agency that regulates banks oversees corporate trustees, audits them annually, and takes action against those found violating federal rules and laws. Individual trustees are not regulated and are not even supervised unless the grantor asks the court to do so which, again, results in additional court costs.

Appointing a corporate trustee assures continuity of administration. Some trusts are administered over many decades. Individual trustees may resign, die, or give up their trusteeship before the trust is fully executed. Corporate trustees have the institutional knowledge of the trust from generation to generation and provide ongoing expertise from a team of skilled professionals.

Corporate trustees often negotiate favorable investment or consultation arrangements because they work with many assets. They can trade individual securities and mutual funds at a lower cost because they do a lot of it and receive volume discounts. Individual trustees generally pay full retail for those services.

Corporate trustees provide regular reports. Beneficiaries have a right to know how the trust is invested, what costs are incurred, what distributions are made, and how much income the trust generates monthly, quarterly or annually. Unlike Uncle Joe or Aunt Mary, corporate trustees are set up to provide regular detailed reports.

Grantors can hold “trustee tryouts.” A client can set up a revocable trust and appoint a trustee to administer it. This gives the client an opportunity to judge the trustee’s service and gives the trustee an opportunity to learn the grantor’s financial affairs and intentions. The opportunity to see the trustee at work gives the grantor the comfort of knowing the chosen trustee will administer the trust properly after their death.

What it boils down to is this: If you have clients who are setting up a trust, they will spend considerable time and money with an attorney drafting the documents and making sure the paperwork describes exactly how they want their assets managed when they can no longer do it themselves or after they die. All of the time-consuming, expensive planning that goes in to creating the trust is wasted if the client appoints an individual trustee who does not have the required skills and knowledge to do it right.