Whether planning for continuity after a health crisis, providing for family, managing taxes, or retaining control over assets after death, trust planning is frequently part of working with high-net-worth clients. But every trust is different, and navigating the complex structures can be daunting. If you're looking to simplify the process while also growing your business, you may wonder, is a corporate trustee right for your clients (and your business)?
To help you make the best decision for your clients, here we’ll cover the basic role of the trustee, plus the benefits of a corporate trustee and the process of appointing one.
The Role of Trustee
Trustees are arguably the most important parties to a trust. They owe a fiduciary responsibility to the trust and its beneficiaries. They’re also responsible for overseeing the trust’s administration, including:
- Protecting trust assets
- Making prudent investment choices
- Filing tax returns
- Maintaining records
- Coordinating trust distributions
But perhaps the most important (and complex) trustee role is making trust distributions. Often, the trust document provides the trustee with some discretion regarding some or all distributions. For an inexperienced trustee, this can be difficult, particularly if he or she maintains a relationship with a beneficiary. In this case, the trustee may be in the awkward position of determining whether that individual can receive a distribution of trust assets. Further, it can expose the trustee to potential litigation should beneficiaries feel that their interests in the trust assets are not being protected.
Many trusts also call for distribution of trust income to the beneficiaries, and calculating distributable net income can be quite complex. As discussed later, state law and the trust language dictate the types of income that are distributable to income beneficiaries. The interpretation of these rules often proves problematic for individual trustees.
Fortunately, there is a way to simplify these formidable tasks: the corporate trustee.
Corporate trustees are banks or trust companies offering trustee services for a fee. Their business is built on acting as trustee for personal trusts, and they offer many valuable benefits:
- Experience: Many corporate trustees have decades of experience. They have legal and financial expertise, educate clients, and manage the day-to-day administrative duties. This know-how can be especially beneficial when there is a special needs trust, which requires the trustee to understand the rules surrounding outside disability benefits and to play an active role in making distributions to meet the beneficiary’s daily needs.
- Objectivity: Because corporate trustees are independent third parties, their decisions regarding the management and distribution of trust assets are objective, thereby protecting the trust’s integrity.
- Continuity: Individual trustees cannot always fulfill their duties, due to illness, personal commitments, or death. Corporate trustees, on the other hand, are likely to be in business for the foreseeable future.
Keep in mind that trust companies are regulated by state and federal agencies, which may provide peace of mind for some clients. For others, however, a corporate trustee can seem impersonal or inflexible when it comes to distributions. They may also be cost prohibitive to those with smaller trust assets.
Appointing a Corporate Trustee
Trust document. Many trusts contain language allowing a corporate trustee to be appointed if an individual trustee cannot or will not act. In fact, appointing a corporate trustee can be fairly simple, provided the current trustee works with an attorney to follow the necessary steps. Some corporate trustees require that specific language be included in the trust document to define the relationship, which should be reviewed and incorporated by your client’s attorney. If the trust document doesn’t contain such language? Then your client’s attorney may need to go to court in order to change this.
State law. The state law under which the trust was formed (i.e., the trust situs) may also affect your client’s ability to name a corporate trustee. Some corporate trustees work with trusts sited in any state; others are based out of a particular state, generally because of that state’s favorable trust laws. If the client’s trust and the corporate trustee’s states of situs differ, the client’s attorney may need the court’s permission to change the situs. Many states, however, now permit a nonjudicial transfer of situs—meaning the situs can generally be changed by giving notice to the attorney or another party.
Freedom to Invest
Using a corporate trustee does not, in itself, limit your ability to invest freely. As always, you are limited to investing prudently on behalf of the trust beneficiaries and must abide by the investment product limitations defined in the trust. The corporate trustee’s oversight of the investment activity is determined by whether the trust is directed or delegated.
- Directed trusts contain language that directs investment authority to an outside investment advisor—relieving the trustee of investment authority or oversight.
- Delegated trusts leave the investment authority with the trustee but permit the trustee to delegate that authority to an outside investment advisor—provided there is oversight by the trustee.
Because corporate trustees are required to oversee the investment activity of delegated trusts, many trust companies work only with directed trusts. Before your client chooses a corporate trustee, be sure the trust company reviews the trust document to determine whether it is directed or delegated.
As you can see, the use of a corporate trustee can have many benefits for your clients, but it can also help build your business. Clients with trust assets held away may bring those assets in-house when given the opportunity to delegate the investment and administrative duties to competent professionals. Further, if your client chooses a corporate trustee suggested by you, he or she may feel more inclined to bring all trust assets under one umbrella. In addition, the use of a corporate trustee can also help ensure that trust assets are retained after a client passes away. Plus, keep in mind that corporate trustees tend to prefer the investment advice of the advisor who initially brought in the business, so it can be a winning proposition for all involved.
What do you see as the pros and cons of working with a corporate trustee? Is this a viable strategy for building your business? Please share your thoughts with us below!