CONSIDERING A CORPORATE TRUSTEE
The practice of putting property in trust dates back to medieval England when large landowners sought to secure their estates in a world fraught with danger. They transferred ownership to a trust and often chose a reliable friend, relative, or a representative of the church to oversee it. The goal was simple: to ensure that everything they had worked—and often fought—so hard to accumulate remained intact and passed undiminished to their families.
Trusts have evolved significantly since then, but for individuals with substantial wealth, the fundamental goal remains the same. Establishing a well-structured trust and selecting a proficient trustee to safeguard, manage, and distribute assets are among the most crucial financial decisions a person can make. Whom you choose as trustee can have a significant impact on whether your wealth transfer plan is executed as you intended.
“AL CAN HANDLE IT” – CHOOSING AN INDIVIDUAL TRUSTEE
A common instinct when establishing a trust is to appoint a close friend, relative, colleague, or family advisor as trustee. Some benefits of selecting an individual trustee include:
- The trustee may have firsthand knowledge of the family’s financial situation.
- The trustee may be familiar with family assets, including any business interests owned by the trust.
- Beneficiaries may feel more comfortable dealing with a familiar person.
However, despite these advantages, appointing an individual as a trustee presents significant limitations and risks:
Liability
An individual trustee is personally liable for any misconduct or mismanagement of the trust. Unlike corporate trustees, individual trustees may struggle to obtain liability insurance to protect themselves. This risk often discourages individuals from accepting the role.
Continuity
A trust can last for decades, sometimes across multiple generations. Individual trustees may lose interest, relocate, become ill, or pass away, requiring a replacement. This lack of continuity can complicate trust administration and lead to inconsistencies in management.
Independence
A trustee’s primary legal obligation is to administer the trust in the best interest of all beneficiaries. Over time, beneficiaries may challenge the trustee’s decisions, especially if they perceive favoritism. A trustee who has personal relationships with the beneficiaries may struggle to remain impartial and make tough but necessary decisions.
Investment Management
Even a trustee who has successfully managed personal investments may lack the specialized expertise required to balance the needs of current and future beneficiaries. Trust investing typically involves:
- Generating income for current beneficiaries while ensuring long-term growth for remainder beneficiaries.
- Complying with fiduciary standards for prudent investment management.
- Preserving the overall value of the trust for future generations.
Administrative Burden and Costs
Managing a trust involves significant administrative tasks, including:
- Legal and tax compliance: Reviewing legal documents, filing tax returns, and keeping detailed financial records.
- Accounting and reporting: Providing annual statements to beneficiaries and ensuring proper record-keeping.
- Ongoing communication: Handling inquiries from beneficiaries and resolving disputes.
An individual trustee often needs to hire professional advisors (attorneys, accountants, and investment managers) to handle these responsibilities, which can make individual trusteeship just as expensive as appointing a corporate trustee.
CORPORATE TRUSTEE: A PROFESSIONAL APPROACH
Many individuals with substantial wealth choose to appoint a corporate trustee, such as a bank trust department or an independent trust company. Corporate trustees provide:
Liability Protection
Corporate trustees maintain fiduciary liability insurance, ensuring that any errors or mismanagement are covered. Unlike individual trustees, corporate trustees have the financial resources to meet their obligations in the event of a claim.
Long-Term Stability
Unlike individual trustees, corporate trustees do not move, retire, or pass away. If chosen carefully, a corporate trustee can administer the trust for its entire duration, ensuring seamless and consistent management.
Impartiality
Family disputes over money can be volatile. A corporate trustee ensures:
- Fair and impartial decision-making without personal biases.
- Strict adherence to the trust document and fiduciary obligations.
- Consistent enforcement of trust terms, even in challenging family dynamics.
Investment Expertise
Corporate trustees employ specialized investment professionals who:
- Develop and implement a customized investment strategy for trust assets.
- Balance income needs for current beneficiaries while preserving and growing assets for future generations.
- Ensure compliance with fiduciary investment standards and state/federal regulations.
Regulatory Oversight and Expertise
Corporate trustees operate under strict regulatory supervision and adhere to:
- Well-defined internal procedures and governance policies.
- Regular audits by internal and external regulators to ensure compliance.
- Expertise in trust administration, fiduciary tax reporting, and evolving tax laws to protect beneficiaries’ interests.
Confidentiality and Security
Privacy is a major concern in estate planning. Corporate trustees maintain strict confidentiality regarding trust assets, ensuring financial matters remain private and secure.
CHOOSING BETWEEN AN INDIVIDUAL OR CORPORATE TRUSTEE
Choosing between an individual or corporate trustee depends on various factors, including:
- Complexity of the trust: A trust with complex assets (businesses, real estate, investments) may require a corporate trustee’s expertise.
- Duration of the trust: Long-term trusts benefit from a corporate trustee’s stability.
- Family dynamics: If potential conflicts exist among beneficiaries, a neutral corporate trustee can prevent disputes.
- Trustee’s qualifications: If an individual lacks financial, legal, and administrative expertise, a corporate trustee may be the better choice.
The Best of Both Worlds: Co-Trusteeship
Many grantors combine both individual and corporate trustees, appointing them as co-trustees. In this arrangement:
- The corporate trustee manages administrative, legal, and investment responsibilities.
- The individual trustee provides family insights and oversight on discretionary distributions.
This hybrid approach allows grantors to retain personal involvement while benefiting from professional expertise.
THE MANY ROLES OF A CORPORATE TRUSTEE
A corporate trustee’s responsibilities include:
- Safeguarding trust assets.
- Balancing the needs of current and future beneficiaries.
- Distributing assets in accordance with the trust agreement.
- Evaluating discretionary distribution requests.
- Managing trust investments responsibly.
- Preparing and filing tax returns.
- Handling specialized assets such as real estate or collectibles.
Unlike individual trustees, corporate fiduciaries are subject to regulatory oversight, ensuring consistent and professional trust administration.
CONCLUSION
Selecting the right trustee may be one of the most important decisions in creating your legacy.
A well-structured trust can preserve wealth for future generations, benefiting both your family and causes you care about. However, trust assets must be managed and distributed wisely. The trustee serves as your surrogate in this critical role, ensuring your wishes are honored.
By carefully weighing the advantages and disadvantages of individual and corporate trustees—or combining both in a co-trustee arrangement—you can create a trust that is secure, well-managed, and aligned with your long-term vision.
This article is strictly for informational purposes and is not intended as an offer or solicitation for any transaction. The information provided is not legal, tax, or investment advice. For such advice, consult an attorney or tax professional.
Investment advisory services are offered through CWM, LLC, an SEC Registered Investment Advisor. Carson Partners, a division of CWM, LLC, is a nationwide partnership of advisors. The views in this article do not necessarily represent those of CWM, LLC. Information is based on sources believed to be reliable; however, its accuracy or completeness cannot be guaranteed.
