A trustee manages the assets, distributions and other obligations under a trust agreement. A corporate trustee is an entity, such as a bank-owned or independent trust company.
There are many types of trusts. One of the more common is a testamentary trust. A testamentary trust is a type of express trust (trusts can be implied or express) that is included as part of a will or in a document incorporated by reference into a will. A testamentary trust specifies how funds and other assets are to be distributed after the death of the settlor (i.e. the person whose assets were put into the trust). The settlor is sometimes also referred to as the “trustor” or “grantor.”
To create a testamentary trust, the settlor must designate a trustee and specify beneficiaries. As mentioned above, a testamentary trust comes into effect when the settlor dies. While other types of trusts may avoid probate, a testamentary trust must go through probate.
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A testamentary trust is often preferred over simply having only a will, for several reasons. These include much greater flexibility they have over mere will in terms of protecting beneficiaries (the people who will receive assets from the trust) from themselves. For example, the person who is planning for her death (i.e. the settlor -or eventual decedent) may wish to make sure that young children, a spouse who is inexperienced in financial matters, or irresponsible heirs do not make bad short terms decisions with newfound wealth that that is bestowed upon her death.
The most commonly stated reason for naming one or more family member as a trustee is that the family members know one another and are thus best equipped to serve in that role.
A trust must, by definition, have one or more trustees. Who should the trustee(s) be?
Some settlors (the person planning for her death) decide to choose an individual, such as a family member to be the trustee of their testamentary trusts. Some choose to select two or three co-trustees. The most commonly stated reason for naming one or more family member as a trustee is that the family members know one another and are thus best equipped to serve in that role. While this sentiment is admirable, it may not always be the best route to ensure an effective and efficient option.
Here are five reasons why hiring a corporate trustee may be wise:
First, a good “trusted” advisor can serve as the coordinator of a person’s or family’s financial well-being. A corporate trustee is uniquely positioned to understand a wide range of issues, including estate planning, taxes, laws and investments, while also administering the legal intentions of trust documents. Trust companies can’t draft legal documents, but they can work with the family and other professionals (attorneys, accountants, etc.) by coordinating and providing perspective on the real issues families face. In baseball metaphor, they are like a good general manager.
An oft-overlooked benefit of hiring a corporate trustee is its use of complex trust accounting systems. These systems are important for the proper accounting of principal and income across multiple beneficiaries. Many wealthy families overlook this facet and inadvertently create accounting nightmares that are often hard to unwind. Record keeping alone can save families valuable time and money, as well as reduce family stress.
Corporate trustees are not only accountable to beneficiaries, but to the government as well. Trust companies must be approved and are overseen by federal or state regulatory bodies. They undergo routine audits and/or exams. Trust companies also have legal requirements for capital, bonding and insurance. Family members may not always be up on the latest laws, nor may they follow legal documents as written.
While some like the idea of family members as trustees, people age, become distracted or are incapable of serving as a trustee. As David Heilich, CPA and Wealth Planner with Brown Smith Wallace in St. Louis told AARP, “Obviously, an executor or trustee has to outlive you, so you wouldn’t want to name your brother or sister if they’re your age or older.” Plus, they may develop differences in opinions. In those situations, a good corporate trustee can serve in an objective, consistent manner, minimizing rifts within the family.
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5. Emotions – Protection of the Family Unit
Whether it be the loss of a loved one or a family member that no longer has the health to manage his or her financial affairs, hiring a corporate trustee can relieve those burdens. This is particularly comforting when emotions run high and differences among family members present problems. In those situations, a third-party decision maker can lead to a positive outcome and protect family balance.
There are many issues to consider before hiring a corporate trustee, such as expertise, chemistry, costs, and the concern that a corporate trustee may be less likely to make the same decisions that the settlor would have made in the same circumstances. This last reason can be addressed in a number of ways, including naming three trustees, one of which is a corporate trustee.
As touched on above, a testamentary trust does not avoid probate. Rather, the decedent’s property must pass into the trust through a will. This requires the probate court process. A funded living trust (or inter vivos trust), on the other hand, does avoid probate.
The concept of revocability is not important in the context of a testamentary trust because such a trust does not even come into existence before the trustor’s death. Thus, the grantor can change her mind about such a trust before she dies. The concept is extremely important in the context of a living trust.
An irrevocable living trust is one in which the grantor relinquishes control over the trust. Such trusts can provide significant benefits related to tax and asset protection (i.e. protecting assets against the claims of potential future creditors).
Reed Murphy has over 27 years of experience, having held a variety of executive roles in the industry, including chairman of the investment policy group of a global financial services firm, which oversaw the creation and distribution of advice to approximately $695 billion in client assets. He currently serves as President and Chief Investment Officer…
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