Ensuring their plans are executed according to their wishes — and protecting them from unexpected pitfalls — is an important consideration for wealthy individuals. As such, a great deal of attention and press is paid to the importance of having a will or well-written trust document to ensure that your legacy is carried out. While this is a critical step, of equal importance is choosing the successor trustee — the person or entity that will carry out those wishes on your behalf.
Successor trustees are held to a fiduciary standard, which means they are required by law to be the caretaker of the grantor’s rights, assets and/or well-being. Because of this fiduciary standard, the successor trustee owes an obligation to both the grantor and his or her beneficiaries to carry out those responsibilities with the utmost degree of care, honesty and loyalty. For this reason, many grantors automatically default to family members or other individuals whom they trust for this role. While this might appear to be the logical choice on the surface, in many cases choosing an individual as a trustee can create unexpected consequences and heartache for everyone involved.
The roles and responsibilities of a successor trustee
Depending upon the value and/or composition of the assets held in a trust, acting as trustee can become very complex. The trustee has a fiduciary responsibility to ensure all of the assets in the trust are administered appropriately, which will include but is not limited to:
· Following the instructions laid out in the trust document;
· Ensuring that trust assets are never mixed with personal assets or
used for the successor trustee’s own benefit;
· Ensuring that all beneficiaries of the trust are treated equally, unless stated otherwise in the trust document;
· Investing trust assets prudently to ensure reasonable growth with minimum risk;
· Keeping accurate records, filing tax returns and reporting to the beneficiaries as the trust requires;
· Arranging and overseeing care for the grantor if he or she is still living.
For many individuals, these duties are extremely time consuming and potentially overwhelming if the individual lacks the necessary expertise. Because of the fiduciary obligation, the successor trustee is personally liable to all the beneficiaries if he breaches his responsibility, whether intentionally or not. As with most matters involving money, tensions can run high and it is easy for the trustee to become embroiled in family politics or even accusations of malfeasance.
The benefits of a corporate trustee
Given the fiduciary requirement of being a successor trustee, many individuals instead select a corporate trustee — typically a financial institution. A corporate trustee can be a smart solution because:
· Corporate trustees will bring a level of expertise that individuals acting as trustee can’t offer, including investment management capabilities and management of special assets.
· Corporate trustees take on all of the liability associated with taking control of the assets contained in the trust, preventing family members from being exposed to potential liability.
* Corporate trustees can ensure that trust funds are applied neutrally and transparently among beneficiaries based on the language of the trust document.
* Corporate trustees offer consistency and longevity that most family members cannot.
Banks acting in a fiduciary capacity as trustee or investment agent have the highest level of fiduciary responsibility imposed by federal regulations and state law, providing the added assurance that assets will be managed appropriately. Additionally, federal regulations require national banks to segregate assets held in any fiduciary capacity from the general assets of the bank so fiduciary assets are not subject to the claims of the bank’s creditors. As a result, a failure of a bank will have no adverse effect on fiduciary accounts as they remain the property of the account’s owner(s).
Also, because a fiduciary is prohibited from self-dealing and must act solely in the interests of the grantor or beneficiary, a corporate trustee cannot give specific investment advice that provides itself, its affiliates, employees, or any third parties with profits resulting from that specific advice. A bank as fiduciary is prohibited from having a profit motive to sell an investment product, and that prohibition ensures that the decisions made in a fiduciary account are truly in the client’s sole interest.
Wills, trusts, foundations and wealth planning strategies have legal, tax, accounting and other implications. Consult a competent legal or tax adviser.