In my planning with affluent clients, I almost always recommend the use of a corporate trustee. I think the benefits of using a corporate trustee far outweigh any potential negatives, and any client with a net worth above $1,000,000 (a common minimum asset requirement for corporate trustees) would benefit their loved ones by selecting a corporate trustee to administer their estate post-mortem.
However, I often find resistance to the idea from clients, often based on erroneous notions. As such, I have tried to develop talking points to assuage my clients concerns, and guide them to the use of a corporate trustee where appropriate. I think many financial professions know intuitively that the corporate trustee is a good concept, but may need further assistance in helping guide their clients. I hope this list of reasons to use a corporate trustee will provide this knowledge and help financial professionals better assist their clientele. There are probably a host of other reasons and rationales, these are just the six that stick out in my mind.
Reasons to Use a Corporate Trustee.
- Complex Trust Law and Frequent Trust Litigation. Often clients will instinctively choose a child or other family member to serve as trustee. 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. Another issue is the complexity of trust law. The California Probate Code has page after page of legal requirements and duties, all of which can lead to a lawsuit and personal liability on the part of the trustee if not followed to the “t”. Your 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.
- Asset Protection. 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. A better idea would be to leave the trust principal in trust 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?
- Professional Guidance. 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 trust work. 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. Don’t most clients want their children and loved ones to have their inheritance properly administered and invested? If the answer is yes, I think a corporate trustee is essential.
- Beneficiaries will retain some control. After I have explained the above three concepts, my clients will often tell me “That all sounds fine Ward, but I don’t like the idea of someone having control over my kids inheritance”. This is a fair question. However, I think a client’s loved ones can get all the benefits described above, while allowing their loved ones to retain some power over the corporate trustee; to “pull back the reigns”, if you will. First, 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. This is the perfect role for a client who wanted a close family friend or relative to serve as trustee for their kids. 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. In addition, clients can give their children the ability to replace the trustee, or even the ability to become a co-trustee at a certain age. Wouldn’t 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?
- 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%. For a little more, shouldn’t beneficiaries receive the benefits discussed above? In the long run, the corporate trustee is a wise investment.
- 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. Hopefully the above five points have convinced the clients of the wisdom of a corporate trustee. If not, this sixth point should clinch the concept.
Hopefully this article will give you the ability to better explain the benefits of the corporate trustee concept to your clients. In my experience as an estate planning attorney, it goes a long way to ensuring the success of their estate plan, and the well being of their loved ones.
