For families using a trust to protect and transfer assets to succeeding generations, choosing the right trustee is critical.
Trustees—who can be an individual such as a relative, or an institution such as a bank—are responsible for managing all the assets within a trust for the benefit of its beneficiaries.
It’s tempting to name as trustee someone who has our complete confidence, such as a spouse, a brother-in-law, or a close friend. But the truth is that being an effective trustee is usually way over an amateur’s head. They likely don’t have the proper insurance coverage to act as a trustee, opening them to enormous personal risk. And they usually aren’t knowledgeable about who to hire—or what to pay—for investment managers and other experts.
Furthermore, most non-professionals just don’t have the time to properly oversee a trust, and if they are friends or family, they may also lack the objectivity to make sound decisions. Finally, an individual trustee may pre-decease all of the family members affected by the trust, creating a crisis of continuity.
For these reasons, many families choose a trust company or other corporate trustee. But this approach can have serious drawbacks as well. Compensation for trust officers is often relatively low, which affects the quality of employees tasked with serving clients with significant and complex wealth.
Lower compensation also leads to a revolving door effect, as inexperienced officers who are unfamiliar with clients replace veteran trust officers.
On top of all these concerns, the corporate trust model is tainted by financial conflicts of interest. The typical corporate trust business derives most of its revenue from asset management. Thus, trust companies and trust departments within banks face the temptation to use in-house asset management, even if better outside alternatives are available. And if investment performance suffers, it’s the rare trust officer who will recommend firing his employer as asset manager.
In choosing a trustee, the trust “consumer” faces a dilemma. The trustee role may be too large, complex and risky for a family member, friend or other individual. On the other hand, institutions with the insurance, administrative capabilities and trust expertise that consumers need may not be completely, well, trustworthy.
Unfortunately, consumers have long been limited to choosing between these two imperfect solutions when selecting a trustee. We believe they deserve a new option: The ability to combine the strengths of individual trustees with those of corporate trust providers.
What if trust clients had the flexibility to form a trustee “board?” What if they could name to the board trusted family members or friends, along with handpicked experts in trust and estate, law, accounting and real estate? And what if this board of trust advisors gained liability protection as well as administration, financial reporting and other services by teaming with an un-conflicted trust company?
It would be the best of both worlds and an evolutionary leap forward in the empowerment of families as they plan their estates. When might this leap occur? The sooner the better! Trust consumers deserve no less.
The information provided is for educational purposes only and is not intended to be, and should not be construed as investment, legal or tax advice. The information is subject to change and, although based upon information that AdvicePeriod considers reliable, is not guaranteed as to its accuracy or completeness. AdvicePeriod makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information.
In accordance with Treasury Regulations Circular 230, any tax discussions contained in this communication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter addressed herein.
Past Performance Is No Guarantee Of Future Performance. Any opinions expressed by AdvicePeriod employees are current only as of the time made and are subject to change without notice. This article may include estimates, projections or other forward looking statements, however, due to numerous factors, actual events may differ substantially from those presented. While we believe this information to be reliable, AdvicePeriod bears no responsibility for the advice or information provided in this article whatsoever or for any errors or omissions. Nothing contained herein should be construed as a recommendation or advice to purchase or sell any security, investment, or portfolio allocation. This article is not meant as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s accounts should or would be handled, as appropriate investment decisions depend upon the client’s specific investment objectives.