Money IQ

Trustee: Corporate v. Individual

You have met with your attorney and discussed your estate planning needs. You have decided that you do want a trust. If you create what is commonly known as a revocable living trust, regardless of the trust provisions, the next big question is once you can no longer act as trustee whether due to death or incapacitation, who should be successor trustee? 

A trustee is a fiduciary who is obligated to the trust beneficiaries as the trustee manages and controls the trust assets. Fiduciary duties confer specific legal responsibilities upon the trustee which most everyday persons do not have the time and/or capacity to actually fulfill.

At a minimum, the trustee is responsible for the following:  understanding and following the terms of the trust document; controlling and accounting for all of the trust assets; protecting the assets; defending the terms of the trust; and accounting for all gains, losses, receipts and trust expenditures.

In reality, these duties encompass a wide variety of daily duties such as managing investments in the trust, paying or challenging trust beneficiary bills, organizing tax documents, hiring accounting and legal professionals, reviewing and signing tax returns, making decisions on discretionary distributions and properly documenting why the distribution is made in order to stave off claims of improper distribution from other trust beneficiaries.

This leads to the next daunting fact: not only is a trustee liable to the current trust beneficiaries, the trustee is liable to the future, or what are known as remainder, beneficiaries.

If you are still reading this, the above reasons should raise a red flag. The big question is should you choose a corporate trustee or an individual trustee?

Here is a list of considerations:

• Liability. A corporate trustee has insurance that will pay if the trustee breaches its duties. An individual may or may not be able to pay for any wrongdoing whether it is intentional or not. A person’s regular insurance policy does not cover his or her actions as a trustee. This requires special insurance, or a bond, which is becoming increasingly difficult to obtain because of the many claims made against individual trustees for breach of duties to the trust beneficiaries.

• Cost/Trustee’s Fee. A corporate trustee has a published fee schedule that follows industry guidelines. The fee schedule takes many factors into consideration but is an amalgamation of the cost of doing business and taking into consideration the other expertise available to the corporate trustee within its own organization—i.e., investment advisors, attorneys and other employees with bookkeeping or accounting experience. An individual trustee is also allowed to claim a fee for his or her work (make no mistake that being a trustee involves a lot of work) which is allowed either by the terms of the trust or laws of the state to which the trust is subject. What becomes unclear, however, is what an individual trustee may charge and how that is determined. What an individual trustee can justify charging may or may not be commensurate with that person’s actual capabilities.

• Experience and Efficiency.  A corporate trustee has the experience and the staff to administer a trust. An individual trustee, while well meaning, may not know the first step of what to do and may not know when it is appropriate to get professional assistance in the fulfillment of all of the trustee’s duties. A corporate trustee will more than likely be able to more quickly process claims, gather assets, account for the value of the assets as well as expenditures from the trust, and consider distribution requests. An individual trustee more than likely has his or her own family and career to consider and acting as trustee becomes a side or night time job.

• Complexity. If the trust is more than a vehicle to manage your assets during your lifetime with outright distributions free of the trust to the ultimate beneficiaries, a corporate trustee may be the best choice to continue administering the trust for the future beneficiaries whether it is a charitable remainder trust, special needs trust, trust for a spendthrift child or grandchild, and so on.

• Independence.  A corporate trustee is not a beneficiary of the trust and has no direct conflict of interest with the trust beneficiaries. An individual trustee is commonly also a beneficiary of the trust which leads to the question of is the trustee acting in the current trust beneficiary’s best interests or is the trustee being self-serving? 

This last point leads to the another big issue whereby some people are concerned that a corporate trustee lacks the compassion, the familial knowledge and the ability to take into consideration other reasons why a discretionary distribution should be made that an individual trustee would otherwise have. There are two ways to address this concern.  One is to remember that a corporate trustee is made up of individual people who actually make the decisions. 

A trust officer is a human being and not a computer program. The second way to resolve this concern is to name a corporate trustee for the financial side of the trust and name an individual as a co-trustee solely to be the trustee who has the final decision making authority on the personal issues in dealing with a trust beneficiary and the requests a trust beneficiary may make for the payment of personal expenses.

There are other considerations in determining whether or not you should name a corporate trustee or an individual to act as trustee. It is a personal choice and largely dependent on your own perception of other family members’ capability and conflicts of personality. Just because your child may be PhD rocket scientist with a Q clearance and is a responsible and respected member of his or her community, does not mean he or she will make a good trustee since all of those attributes are admirable but have no direct correlation in the fulfillment of a trustee’s duties.

If you are contemplating whether to name a corporate trustee or an individual, consider talking to someone in the trust department of your financial institution or at a local trust company that provides the same services.

Editor’s note: Dara L. McKinney is a Trust Officer at Los Alamos National Bank. She has worked at LANB since January 2009

• Look for Money IQ columns published regularly in the Los Alamos Daily Post.