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Many Estate Plans rely upon a revocable trust as one of the foundational documents in the plan to avoid probate. Sometimes, plans include irrevocable trusts to achieve tax-driven results or for other reasons. No matter which kind of trust a client considers, of the many decisions that clients make when creating an Estate Plan, naming a trustee tops the list in importance. Some clients prefer to name an institution or entity to serve as trustee.
This third part of the three-part series will discuss the deliberations that should occur when a client names an institution, rather than an individual as trustee. The first part, How Do I Trust Thee…Part I, of the series focused on issues to consider in naming any individual as trustee, and the second part, How Do I Trust Thee…Part II, explored issues in naming the grantor of an irrevocable trust as trustee of the trust.
Entities serving as trustees provide numerous benefits. For example, a client naming a corporate trustee generally has less concern regarding the judgment, experience, impartiality, investment sophistication, accounting, record-keeping, or potential conflicts of interest of the entity. Most institutional fiduciaries bring substantial business skills to the office of trustee. The individuals working for the entity and monitoring and administering the trust account usually report to a board, committee, superiors, or a combination of all three to confirm proper investment, administration, and distribution of trust assets. Corporate trustees understand the market and have experts to guide investment choices. Clients benefit from this knowledge. In addition, most corporate trustees have a plethora of attorneys, accountants, and other professionals to whom they can refer a beneficiary, even on an unrelated matter. The grantor and beneficiary benefit from both the internal and external relationships of the institutional trustee.
As noted above, a corporate trustee brings experience, objectivity, and professional resources to the office of trustee. For this reason, corporate trustees tend to dampen family squabbles that might otherwise result from naming an individual to serve as trustee. Consider the resentment that could occur from naming one family member as trustee of the trust created for the benefit of another. Further, with an individual trustee, beneficiaries may wonder whether another beneficiary has influenced the trustee because anytime the trustee says yes to one beneficiary, that almost universally means saying no to another. Corporate trustees operate without bias and comply with both federal and state regulations. Thus, what the trust and beneficiaries lose in personalization, they gain in oversight.
Corporate trustees bring continuity to the office of trustee. Entities have perpetual life absent catastrophic circumstances, whereas, all individuals die, sometimes unexpectedly. Naming a corporate trustee removes the burden of naming a successor trustee and guarantees that the same trustee continues to serve for the duration of the trust unless removed. A corporate trustee possesses the potential ability to manage the trust in perpetuity from record-keeping to asset management which, given the increasing length of most trusts, adds another benefit to the beneficiaries.
Finally, corporate trustees understand the complex tax implications for a trust. For example, they understand and can explain the impact that allocation of gains and losses will have on the income of the trust and its beneficiaries. Naming a corporate trustee may also provide gift and estate tax benefits as well because provisions of the Internal Revenue Code qualify an entity as an independent trustee which could carry significant tax benefits for the grantor and beneficiary by preventing inclusion of the assets in the estate of either. This also allows the grantor to include broad discretionary distribution powers in the trust.
All these benefits come at a cost. Institutional trustees tend to charge higher fees than individuals and some beneficiaries miss the personal touch that comes along with the use of an individual trustee. Many of us have heard stories about an unresponsive corporate fiduciary. Typically, only specified financial institutions, such as banks and trust companies may serve as trustees. In some states, a charity may serve as trustee of a trust benefitting that charity, or another one. Some states require the institutional trustee to have a substantial presence in the state in which administration of the trust occurs. Other states have reciprocity rules and permit a corporate fiduciary from another state to serve if the other state recognizes corporate fiduciaries from the first state. Even if the foreign entity otherwise meets the requirements to serve in another state, the entity needs to file all necessary documents to qualify to do business in the new state. This often requires designation of a resident agent along with other information.
Although many clients may fear the perceived loss of control that comes with a corporate trustee, as this article demonstrates, naming such a trustee provides many benefits. The size and complexity of the trust plays a role in determining whether an individual or corporate trustee should serve. The individuals administering the trust for a corporate fiduciary interact with other highly qualified individuals to provide the best result for a beneficiary. Corporate trustees can ignore family tension and have well-defined policies regarding distributions. The grantor may include broad discretionary distribution powers without worrying about the potential income tax implications for the corporate trustee. Corporate trustees combined with broad discretionary distribution power may provide significant creditor protection. Finally, clients may leave a level of control with the family by allowing the beneficiaries to remove and replace a corporate trustee. As this series demonstrated, the grantor of a trust has competing interests to consider in naming a trustee. With the help of a qualified Estate Planning attorney, the client can determine whether a corporate trustee or an individual trustee will serve the family’s needs better.
Tereina Stidd, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128