Transferring your legacy

7 Benefits of a Corporate Trustee

18 Minute Read

Taking care of your assets as they pass to the next generation is no small task. There is plenty to think about, and it’s easy to make mistakes. One common and potentially costly mistake is to name a family member as successor trustee, the person or entity tapped to carry out the wishes of the grantor, the person who sets up a trust.

The role of successor trustee is enormously important because there is so much to take care of, the stakes can be high, and errors can be costly and create delays.

Nevertheless, all too often, inexperienced and unprepared family members are named to this highly critical role, because their loved one wanted the successor trustee to be someone known and trusted. Read on to learn why choosing family members to serve in this role is often ill considered.

7 reasons why a family member might not be an ideal trustee

1. The Fiduciary Standard Creates Legal Liability

Successor trustees are held to a fiduciary standard. That means they are required by law to be the caretaker of the grantor’s rights and assets and/or provide for their well-being as described in the trust. As such, the successor trustee must carry out responsibilities to the grantor and his/her beneficiaries with the highest degree of care, honesty and loyalty. A trustee failing in this regard can be held legally liable.

“A lot of family members who take on this role think they’re immune from liability because they’re not getting paid,” says Carlee Harmonson, Fiduciary Management Executive and Managing Director, Union Bank. “But that doesn’t matter. The court will hold you to the same responsibility level as a corporate trustee.”

2. It's Complicated

Among other duties, the job of successor trustee includes overseeing investments to make sure they are managed prudently, provide competitive returns and are diversified so as to provide reasonable growth with minimal risk. The trustee must faithfully follow the trust document, keep accurate records, file tax returns, report to the beneficiaries and treat all beneficiaries impartially, arrange and oversee care, and never use trust assets for personal benefit.

3. Duties Call for a Thorough, Comprehensive Approach

The many responsibilities managed by a successor trustee include locating and valuing all assets, including securities, real estate and business interests; overseeing investment management; tax reporting; and ensuring sufficient cash flow, which might involve conducting a cash flow analysis.

Cash flow needs can vary greatly, particularly if there’s a need to pay for long-term care for any length of time. Tax oversight can be quite involved and call for a level of expertise and familiarity that few lay people would be expected to have.

Case Study:

Above and Beyond the Call of Duty

4. It's Time Consuming

Every trust and situation is different, but the many responsibilities outlined above can consume a lot of time. Before you name a family member as successor trustee, think about how much time that person would be willing or able to devote to that responsibility. Often, the family member is juggling other important responsibilities as well, such as a full-time job and family.

5. Family Ties Can Be Emotional Ones

It’s fairly typical that family members don’t all get along. If a family member acting as trustee isn’t trusted or is resented or second-guessed by other beneficiaries, it could create a messy situation.

“It used to be that people wouldn’t think about the risk of their siblings suing them. But that is much more commonplace today,” Harmonson says.

6. A Same-Generation Trustee Might Lead to Continuity Problems

If you name a trustee who is roughly your age, there’s roughly a 50-50 chance that he or she will predecease you or become incapacitated. That could be problematic if you consider the continuity needed in the case of many trusts.

Multigenerational trusts that have grandchildren as beneficiaries could exist for decades. Therefore, it’s prudent to name a trustee who has the wherewithal to provide continuous service for many years.

7. Inexperience Can Be Costly

Experience is always important. It can save time and money in even fairly basic cases, as thoroughness and sound recordkeeping are essential. “When you’re dealing with a large sum of money, you need to ensure the documentation is appropriate,” Harmonson says. “We have an account with an estate of over $100 million and the individual named as the trustee didn’t keep good records. As a result, they need to go back and recreate five years of records for all the transactions that occurred in the trust to be transparent to the beneficiaries.”

The complexity of a trust, the required time commitment of a trustee, and the related level of knowledge and experience demanded by the situation can vary greatly. Often, specialized knowledge can be highly beneficial. For example, what if the grantor becomes incapacitated and needs long-term care? In other cases, there are complex tax liabilities, or a trust document might have been written in an overly restrictive way, calling for a specialized skill level or knowledge as to how to address the situation.

“When I started in this business, interest rates were in the 14% to 15% range,” Harmonson recalls. “Based on that environment, some people stipulated that they only wanted the trustee to invest in fixed income. That worked great then, but interest rates have been near zero percent for a long time. So, that restriction, well intended at the time, no longer makes sense from the perspective of prudent stewardship. An experienced trustee can avoid or work around such restrictions.”

In summary, having an amateur doing the job of a professional might feel good but could end up being costly.

7 major benefits of a corporate trustee

1. Professional Service

Given the variety of responsibilities involved in being a successor trustee, from administrative duties to legal concerns, and the need for familiarity with investments, insurance, taxation, estate planning and the overall welfare of the trust’s grantor and its beneficiaries, having a professional in charge can be beneficial in many ways.

2. Fiduciary Role

A corporate trustee will be much more adept at upholding a fiduciary standard—and thereby avoiding the legal liabilities that would apply in the event that standard is not met—compared with an individual layperson. It doesn’t matter that a trustee is well intended and simply being negligent because of a lack of experience or qualifications. If the fiduciary standard is violated, the consequences will be the same.

3. All-In-One Comprehensive Service

Hiring a corporate trustee leaves all matters in the hands of a reliable organization that specializes in trusts. That corporation can provide a full range of services, from overseeing investments to valuing real estate and other assets to doing tax reporting and being custodian of the assets. With all of that comes efficiency and cost effectiveness.

“It’s an all-encompassing role,” Harmonson notes. “When we are named as trustee, we assume investment

and tax management because the two items are so closely linked. For example, if we’re selling assets, we need to be able to look at the gains versus the losses and be tax efficient in the way we sell, offsetting gains with losses as appropriate so as to minimize tax liabilities.

“We value assets and business interests such as limited partnerships and LLCs, including those that hold real estate. If a family member were entrusted with that, they’d have to separately hire a valuation firm. All those things are wrapped in our services.”

Case Study:

Using Impartial Outsider Averts Family Clashes

4. Capable of Managing Special Situations

No two trust situations are the same. Indeed, trusts sometimes involve unusual or special circumstances. That’s where the benefits of having experienced professionals acting in the trustee capacity can make a big difference. What if assets are unique and difficult to value, such as art, antiques or other collectibles, farm and ranch assets, timber, minerals, royalties, hedge funds or other complex assets?

Not only are these types of diverse assets challenging to value, but many of them also expose the owner to high levels of risk, including environmental liabilities, and involve unique forms of documentation. This is where professional asset management and risk management can be particularly relevant and valuable.

Other special situations can involve the beneficiaries rather than the trust assets. Many beneficiaries have special needs, such as mental health issues or drug addiction. These challenges are increasingly common and can require the experience, attention and resources of a corporate trustee to find the right solution.

5. Objective Decision Making

Using an impartial, external, third-party trustee, such as a corporate trustee, could avert potentially damaging and difficult emotional battles that could ensue in the event that a family member was to be selected as trustee. This could be an important safeguard, and way to maintain a healthier family dynamic, at an already challenging time as the beneficiaries deal with the loss of a loved one.

6. Extensive Resources

The extensive resources of a corporate trustee encompass the collective experience and insights of staff who specialize in managing trusts, as well as the technological resources available to them. Also invaluable is their easy access to reliable external partners, specializing in a range of services, from accounting and business valuation to insurance and legal.

7. Capable of Managing Special Situations

Continuity and the avoidance of disruption are of particular relevance in situations where trusts are set up for the ongoing needs of multigenerational beneficiaries, including the children and grandchildren of the grantor. A corporate trustee will reliably maintain consistent, dependable, professional, ongoing service indefinitely.

What to look for when choosing a corporate trustee

  • Expertise. By choosing a corporate trustee, you’re looking for a level of expertise that you won’t find in an individual such as a close friend or family member. You’re looking for a level of professionalism and deep experience with diverse situations, particularly if your situation is somewhat unique. A good corporate trustee should have extensive, specialized expertise enabling it to handle virtually any type of transaction. Look for a corporate trustee with a well-established track record.

By choosing a corporate trustee, you’re looking for a level of expertise that you won’t find in an individual such as a close friend or family member.

  • Extensive resources. The organization should be able to take all trustee-related tasks and concerns off your hands. This could mean in-house capabilities such as custodial services, investment management and estate planning, as well as strong relationships with external experts, such as accountants, lawyers and specialists in valuating businesses and real estate.
  • Ability to handle non-traditional assets and special situations. Very often, the assets in a trust consist of a variety of traditional assets, such as stocks, bonds and real estate, as well as non-traditional assets, including so-called “real assets”—physical assets such as minerals, timber, farm equipment—as well as patents and music and other royalties. Having a strong track record and extensive experience and resources can be a major advantage in this regard.
  • Commitment to clients and a desire to build and maintain a close long-term relationship. A level of service that goes well beyond transactions is important when dealing with the intergenerational transfer of wealth within a trust. In addition to the importance of maintaining a high level of trust when so much is at stake—especially at a difficult family time—the successor trustee-client relationship can go on for years and decades.

 

The contents in this article are being provided for educational and informational purposes only. The information and comments are not the views or opinions of Union Bank, its subsidiaries or affiliates.

Wealth planning strategies have legal, tax, accounting and other implications. Prior to implementing any wealth planning strategy, clients should consult their legal, tax, accounting and other advisers

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Wills, trusts, foundations, and wealth-planning strategies have legal, tax, accounting, and other implications. Clients should consult a legal or tax advisor.