What is a Corporate Trustee?
A corporate trustee is a private company that serves the same role as an individual might serve as your trustee. There are several key distinctions between the corporate trustee and an individual trustee.
- A corporate trustee is a private entity comprised of individual trust officers and back-office or administrative support.
- Trust companies are usually part of a larger holding company, such as a bank.
- Trust companies are chartered and regulated in individual states.
- Trust companies have a fiduciary duty to the trusts and beneficiaries they serve.
When Should Corporate Trustees be Used?
All trusts require a trustee to serve, whether it is a person or a corporate trustee. Corporate trustees are well suited to serve as trustees in several different situations. Some of the most common reasons are as follows:
Blended families or difficult family dynamics
A trustee’s primary duty is to serve as a fiduciary, which means they must balance the current needs of current beneficiaries against the desires of future beneficiaries. In blended families, the composition of the family can make this balance even more difficult. Stepchildren may believe that the surviving spouse is deliberately drawing too much trust principal to disinherit them. Or a child that is serving as trustee may limit the access of the adult parent to better protect the principal of the trust for their own inheritance. In other situations, beneficiaries may have difficultly managing their own finances and may potentially squander their inheritance. In each of these situations, a corporate trustee can serve as an independent, objective outsider, following the direction of the trust terms and distributing trust income and principal as the trust maker intended.
If ever a divorce or creditor claim arises, that third party may have an argument to try and reach a beneficiary’s trust assets when the beneficiary or a closely related person to the beneficiary serves as trustee. The argument is that, because the trustee and the beneficiary are the same, or very close to the same, the beneficiary always has access to the trust assets, and therefore should be included as assets available to satisfy a judgment. Using a corporate trustee completely removes this argument from the conversation.
Some trusts, due to either their structure or their size, require significantly more tax, administrative, and legal needs, or strategies. With the increase in complexity, additional expertise is needed to ensure that the assets of the trust are being managed appropriately while maintaining proper record keeping, tax filing, legal compliance, and so on. Corporate trustees bring years of experience working with complex trusts compared to individual trustees.
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What Pitfalls Should I Avoid When Working with a Corporate Trustee?
Corporate trustees can be a good solution for many estate planning considerations. However, there are pitfalls that one needs to be aware of before naming a corporate trustee.
Conflicts of interest
As previously stated, many corporate trust companies are a department within larger banks or other holding companies. These entities will usually have their own investment management departments. As an independent registered investment advisory firm, Mission Wealth has seen this situation play out before. A trust company is named, and the trust office decides that the internal investment management department is better suited to manage the trust’s assets. Usually, that investment management team utilizes its own proprietary investment products. This carries a conflict of interest because those investments may not necessarily be the best option for the trust and may carry expensive embedded fees that the trust and its beneficiaries would pay.
The trust officer and investment manager may have a conflict of interest because they may be incentivized to roll that trust into the management company or the internal trust company to maximize the company’s revenue and the potential commission they receive.
Like above, many trust companies are part of a larger company. Generally speaking, where a trust company is part of a larger group, the standard fee for trust management is usually between 1% to 2% of assets under management. This fee quickly rises when internal products and investment management services are utilized.
In one instance, we worked with a client who was expecting to pay more than 3% per year if the bank trust company and investment company were to manage his trust.
Trust company jurisdiction
Where a trust company is chartered is important and often overlooked when selecting a corporate trustee. Many trust companies are registered and chartered in only one state, and should they be called on to serve as your corporate trustee, your trust will need to be moved from your current state to the new state. In some cases, this is a painless process if your trust includes language allowing this to be done.
If the trust does not include that transfer language, you may have to petition the court to have your trust moved, costing more fees. If you are trying to avoid the court system by using trusts as your primary method of estate planning, you could find yourself back where you started.
Mission Wealth’s Approach to Corporate Trustees
At Mission Wealth, we recognize that many of our clients may have a need for corporate trusteeship for their own family or individual trusts. As an independent registered investment advisor firm, we take our fiduciary duty seriously, and always strive to steward our client’s hard-earned assets in the best way possible. That’s why we have vetted several external, independent trust companies that we can partner with to provide the best service to our clients, at a reasonable price. By collaborating with independent trust companies, we can work with excellent service providers at a fraction of the cost of standard trust companies. Additionally, because we are not wedded to one trust company, we can work with a trust company in the jurisdiction that makes the most sense for your specific situation – your square trust won’t be forced into a round state hole. Further, because we work with our clients over a lengthy period of time, we get to know and understand their goals for their legacy, and we work in tandem with independent trust officers to ensure that those goals are carried out as long into the future as possible.
If you are interested in working with Mission Wealth or in finding the best corporate trustee for your situation, please don’t hesitate to contact us at missionwealth.com.
Estate planning with wealth can be complicated. Our Director of Estate Strategy Andrew Kulha would be happy to discuss your options and review your specific estate planning goals. Learn more about our estate planning review here.
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