You have a Living Trust, who acts as Trustee?
>> Monday, March 31, 2008
Six Reasons for Why You Might Need to Use a Corporate Trustee
Over the years in my work planning for affluent clients, I have often recommended the use of a corporate trustee. It is not common that a client’s initial decision regarding the trustee often is the eldest or most responsible or successful child or grandchild. There is often a notion in the client’s choice that there is some honor or distinction associated with naming a loved one as trustee, but upon a further understanding of the complexity of the issues and the work involved with acting as a proper trustee, the client recognizes the value and strategic logic of choosing a corporate trustee.
Some may ask, what is the typical threshold when a corporate trustee is right for a client? This obviously must be handled on a case by case basis, but as a general rule of thumb when a client’s net worth is above $1,000,000 (a common minimum asset requirement for corporate trustees), the benefits and cost of utilizing a corporate trustee far outweigh any potential negatives and the burdens placed on a loved-one forced to sit in the trustee position based on an improperly held notion or idea.
In every conversation with an Axis Legacy & Trusts client we present the following six reasons why a corporate trustee should be considered when the total value of assets exceeds $1,000,000. The client is often shocked to see how quickly their assets can total a million dollars because in an estate planning sense you must include the value of your home, life insurance polices, IRA’s, and investments. Additionally, many financial professionals are aware that advanced planning strategies become necessary as assets approach the 2008 annual estate tax exclusion limits of $2,000,000.
Six Reasons to Use a Corporate Trustee.
1. Complex Trust Law and Frequent Trust Litigation.
The primary and most fundamental reason we stress to our clients is the complex and advance legal nature of many of the issues and procedures that a trustee will ultimately be responsible. The Florida Probate and Trust Statutes have page after page of legal requirements and duties, all of which may lead to a lawsuit and personal liability on the part of the trustee if not followed to the “t”. A client is not honoring their family member, family friend, or child by naming them trustee. Rather, they are often causing them unnecessary work and frustration.
Often a client will instinctively choose a child or other family member to serve as trustee. In far too many instances this choice is often not the right one, and leads to problems. The choice of the eldest or most accomplished child as trustee will often lead to jealousy and bickering by other siblings, as they feel not only slighted by not being chosen trustee, but angry that their sibling now has so much control over their financial affairs. This commonly leads to litigation, and frustration on the part of the trustee, who wishes they had never been selected in the first place. Instead of a child, clients often choose another individual family member or friend to serve as trustee. This choice is also wrought with the same problems discussed above.
2. Asset Protection.
We have many clients come to us with a previously prepared estate plans, unfortunately, many trust based estate plans I see come across my desk call for a child to serve as trustee, and distribute inheritances outright to their siblings upon the death of their parents.
While this type of trust avoids probate, it fails to accomplish any level of asset protection for the beneficiaries. When ever a new client has a plan like this we recommend they consider installing a corporate trustee and restructure to the distribution mechanism.
We offer that a better idea would be to leave the trust principal in trust under the direction of a corporate trustee for the duration of the child’s life, with asset protection provisions to ensure that if the child is sued, gets divorced, or goes bankrupt; their inheritance will still be there for them. If an inheritance is distributed outright to a child, the asset protection is lost. If the child serves as sole trustee of their own trust, the asset protection is minimized. Affluent clients routinely pay tens and hundreds of thousands of dollars to set up offshore asset protection trusts to protect their own assets. Shouldn’t they do the same for their children, at a fraction of the cost?
3. Professional Guidance.
When you hire a corporate trust officer you have the benefit of an entire institution as opposed to a single individual or family member. Some of the most reputable corporate trust companies have been in business for more than 100 years and have reputations and track records that can be researched and compared. The employees of these companies are often some of the best and brightest professionals in the finance and legal worlds.
Most trust officers I come into contact with are law school graduates, often licensed to practice law and with advanced degrees such as an LLM in Taxation. These individuals often have worked for years as an estate planning attorney prior to their positions acting as a corporate trustee. In addition, they have the assistance of many other qualified financial advisors at their disposal. This ensures that the trust assets will be safe, the trust will be properly administered, and the beneficiaries will get quality financial advice. The administration of a trust is extremely complicated. Tax returns must be filed, accountings must be done, and many notices must be sent. Most clients want their children and loved ones to have their inheritance properly administered and invested. It is difficult to match the expertise and competency of corporate trustee.
4. Beneficiaries will retain some control.
Almost all conversations follow the same road map. After we move past the first three points a client will sit back in their chair and say, “That all sounds fine, but I don’t like the idea of someone else, a stranger having control over my kids inheritance.” And every time it is acknowledged that this is a very rational position to take. However, perhaps it is best where you don’t choose an absolute and move completely to one side or another, but perhaps take the strong points of both sides and try to find a solution in the middle. A client’s loved ones can get all three of the benefits described above, while allowing the client and their loved ones the ability to retain some power over the corporate trustee; to “pull back the reigns”, if you will.
A couple examples of how this might be achieved:
#1 – Appointment of a Trust Protector.
The client can choose a trust friend or non-conflicted advisor to serve as a trust protector if so desired. A Trust Protector serves in a non-fiduciary role, and is able to monitor the actions of the trustee, and replace the trustee if necessary. As trust protector, they will retain some control over the actions of the trustee, while at the same time not being subjected to the threat of lawsuits and administrative hassles of a trustee.
#2 – Ability to Remove the Corporate Trustee.
A client can give their children the ability to replace the trustee, or even the ability to become a co-trustee at a certain age. Most clients agree that the ability to remove the hassle and liability of serving as a trustee, while giving their loved ones a good deal of control over the trust, is a great benefit.
5. Cost is really minimal in the long run.
Most corporate trustees charge an annual fee of between 1% and 2% of the assets in the trust. This fee does not start until the corporate trustee actually begins serving, which is usually at the death of all creators of the trust. If the children were to receive the money outright, without a trust, and invest the funds with a financial professional, the fee would often be 1%. In the long run, the corporate trustee is a wise investment.
6. Children often blow their inheritance.
This is placed last for a reason. I do not like bringing this up to clients. Clients often do not like to hear the reality that their children may blow their inheritance. Yet the reality is clear that most inheritances, if received outright, are consumed within 1 year. This realization may be hard for clients to comprehend, but the evidence is clear that in order for a beneficiary to receive the most benefit from their inheritance over their lifetime, an independent trustee is necessary. It is possible to then employ spendthrift safeguards that will protect the corpus of the inheritance and help insure a lasting legacy.
Respectfully submitted by:
Donald L. West, Jr., JD, CTEP
Chartered Trust Estate & Planner
Don West, Jr. counsels families, individuals and entities on the principles of generational legacy and wealth transfer as a Vice President and Trust Officer for Axis Legacy Planning & Trusts, P.L., an elite wealth management firm with a unique planning philosophy of promoting "Healthy & Sustained Family Wealth" with offices in Atlanta, Georgia and four Florida locations: Tallahassee, Tampa, Palm Beach and Miami.
