Choosing a Corporate Trustee: The Pros and Cons

A businessman with a briefcase stands in a field, deciding which path to choose from two before him.

(Image credit: Getty Images)

Many of us give lots of thought to the trusts that we create for our loved ones. We consider the tax efficiency involved in creating and funding these trusts. We also craft, with painstaking detail, the provisions that drive mandatory and permissible distributions from these trusts, the management of trust assets and the reasons these trusts may be terminated.

What we often only briefly consider is who we appoint to be responsible for carrying out the decisions we have prescribed in the trusts. Is it a family member? A trusted friend? An attorney or CPA? Or is the best choice a corporate trustee?

The reasons for naming a family member or friend are somewhat obvious — this is someone you know and trust and someone you believe will best carry out your wishes. When considering a “professional trustee,” though, the decisions are a little more difficult.

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Why name a corporate trustee to serve?

For one, they are perpetual — they do not die. Your friends and family (and attorneys and CPAs) will die someday, and they also may not have the professional experience you need. Corporate trustees, ostensibly, have a wide depth and breadth of experience in administering trusts, which could be valuable. In theory, corporate trustees carry out a trust’s terms dispassionately and impartially and in strict adherence to its terms. All of these are good reasons to name a corporate trustee.

There are some challenges in naming a corporate trustee. A corporate trustee’s fees may be expensive. Often, the fee is a percentage of the assets under management, and it has nothing to do with the efforts involved in managing the assets. Also, consider that corporate trustees often require assets be held in their custody as a condition for serving. That may not be in the best interests of the beneficiaries if the corporation’s trust platform has limited investment options available for the trusts they manage.

And one of those compelling reasons to name a corporate trustee — impartiality — can be a double-edged sword. With that impartiality often comes rigidity and inflexibility. Impartiality has its benefits, but will your loved ones be put off or frustrated by the impersonal nature of a corporation making decisions on their behalf?

Which outcome, at the end of the day, is worse: straining the familial relationship between trust beneficiaries and Uncle Bob, or making your children and grandchildren feel abandoned by forcing them to seek a corporate trustee employee’s approval to access the money you left in trust for them?

Keep in mind, though, that being a trustee is not easy — and that sometimes saying no to a beneficiary is the right decision. Some of the critical tasks a trustee must complete are the administration of the trust, the accounting of trust activity and the filing of federal and state returns, all while adhering to the fiduciary standard and documenting every task. One may opt to lean on a corporate trustee or to appoint a corporate trustee to serve as a co-trustee to share the workload and the liability that comes with the job.

How does naming a corporate trustee affect estate planning and administration?

If you decide you want to appoint a corporate trustee, they are all the same, right? You’ve seen one, you’ve seen them all? Not so. Corporate trustees vary by experience, by capabilities and by resources. It is important to understand the reasons you want to appoint a corporate trustee and compare several to determine if one is a better choice than another. While in this discovery phase, be sure to consider these questions:

Does your wealth management advisory team work for a corporate trustee?
Who do you value more: your team or the corporation? Once you have named the corporation, the team may leave that corporation before the time comes for the trustee to serve.
Will it be a member of your team that serves as trustee, or a separate department whose actions are driven by the legal and compliance teams?
Is it easy to change the trustee appointment?

All of these considerations are extremely important as you decide who will administer the trust for your loved ones — this can make or break the decision. In addition to the “who,” you must consider the “how.” If you like the individuals working at the corporation, make sure you know how the corporation will serve.

How much money will the corporation charge to serve? Is there a fee schedule?
Are there added fees if your trust holds real estate, a closely held business interest or any assets that are not marketable securities?
Will the corporation serve as trustee if these assets are held by the trust? Or will the trustee refuse to manage some of the trust assets?

These questions often pop up after the trustee has been named in the trust agreement, which could mean the grantor may no longer change the trustee appointment, depending on language used in the trust. Worse still, these questions may arise after the creator of the trust has passed away.

Because a corporate trustee will strictly adhere to the governing trust document, make sure that your trust describes your intentions with clarity and specificity and tells a trustee what to do with unique assets. For example, you must clearly direct that a trustee may hold specific assets (e.g., residences, vacation homes or interests in the family business), even if the value of that asset represents a significant percentage of the total trust assets. This still may not satisfy a corporate trustee, potentially leading to its refusal to serve.

Clearly instruct a trustee what to do under unique circumstances, such as accommodating a beneficiary who has special needs or with a history of drug or alcohol abuse. Beware: More and more often, this sort of language leads a corporate trustee to decline to serve rather than be forced to make these decisions in special circumstances.

Address if and when the trustee may collect extra fees, or prohibit the trustee from doing so. If it is not prohibited, there is a risk that the corporate trustee will collect unanticipated fees that are permitted by trust language authorizing it to collect fees in accordance with its then-current fee schedule.

Finally, if a corporate trustee requires specific language in order to serve, make sure you understand all the implications of that special language. Sometimes, there is language it will not allow. Both instances may lead you to think twice about naming the corporate trustee.

What will naming a corporate trustee mean in 10 or 20 years?

As you contemplate naming a corporate trustee, remember to think not just about today but also about the future. Think about what may or could happen 10 or 20 years down the road.

What if your preferred contact or team no longer works for the corporate trustee?
What if you no longer work with your team at that corporate trustee?
What if the corporation has changed substantially since you appointed it as corporate trustee?
What if you no longer work with that corporation?
How easy is it to change the designation of that corporate trustee?

Tightening regulations have made legal and compliance departments of corporate trustees (especially the large ones) extremely sensitive to their company’s risks. This leads to corporate trustees making decisions governed by the corporation’s best interests — not the beneficiaries’ best interests. Often, a committee or someone whom the trust grantor and the trust beneficiaries have never met is making decisions purported to be in the best interests of the trust beneficiaries.

Because of this and other factors, you may (and perhaps should) endow one or more individuals with the power to remove and replace a corporate trustee, for any reason. This allows for someone to change the trustee if there is a change of circumstances, whether that is a change in trust assets or the circumstances of beneficiaries. Or, suppose the corporate trustee is extremely rigid and inflexible with trust distributions — this will allow someone to rectify the situation by changing trustees.

Corporate trustees are sometimes a reasonable choice if you have a complex family, complex trust assets or complex circumstances, but be careful. It is important to understand this structure, who you are choosing, how choosing that trustee may evolve over time and how someone may revisit the decision in the future, whether it is the grantor or beneficiaries.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Christopher F. Tate, J.D., is Partner and Wealth Strategist at Fidelis Capital, an advisor-owned wealth management firm dedicated to addressing the complex investment and planning needs of ultra-high-net-worth clients and institutions. With nearly 30 years of experience, Chris specializes in wealth planning, advanced estate planning and cash-flow planning, delivering comprehensive strategies to Fidelis Capital’s UHNW families and institutions. His focus lies in creating tax-efficient wealth transfer solutions spanning generations, income replacement plans for clients undergoing transitions and wealth strategies tailored to the unique and intricate needs of each family member.