Why Should I Consider A Bank As A Trustee Of My Trust?
When planning your estate, one of the tools that you might consider is some form of trust. This might be (a) a revocable trust that you create during your lifetime (the so-called "living trust"), (b) an irrevocable trust that you create during your lifetime or (c) a testamentary trust, one that is set forth in your will and takes effect upon your death. In any of these instances, you must consider whom to name as trustee or co-trustees of the trust. The trustee can be one individual, multiple individuals, an institution (a bank or trust company) or a combination of an institution and one or more individuals. This article will explore the reasons you might want to consider naming a bank as your trustee or co-trustee (See other articles about trusts and related topics at this website).
One of the major reasons people are often reluctant to appoint banks as trustees of their trusts is the fear of the bank's fees. People often act under the delusion that banks only charge fees and if they name an individual as a trustee, that individual will not take any fees for his or her services. Experience demonstrates that, except where a spouse or a child acts as trustee, individuals as well as banks do take fees for services. Even children often take fees as well. A "reasonable" fee for an individual trustee is often no different than a "reasonable" fee for a bank trustee. Therefore, an attempt to save the trust from paying fees to the trustee is often a poor reason for rejecting the use of a bank as a trustee. Furthermore, some of the work included in the scope of the bank trustee's services - such as preparation of annual income tax returns - would result in additional fees if the individual trustee could not perform the work himself or herself and had to hire an accountant or other professional to perform that work.
In many cases in which the client selects a bank as trustee, an individual co-trustee is also appropriate. In those cases, there may be an additional cost because the individual co-trustee receives a fee in additional to the bank's fee. This fee for the individual co-trustee is generally significantly smaller than the bank's fee.
What advantages might there be from having a bank serve as your trustee?
- Professional Management - actions - investments - record-keeping - tax returns
- Objective Exercise of Discretion
- Avoiding Conflicts of Interest
- Insulation for the Individual Trustees
- Protection Against Misappropriation of Funds
Professional Management - When a bank serves as trustee, people in the bank's trust department manage the trust. Management of the trust is the full-time job of these people. It is not something they do when not working at their real full-time jobs; it is not something forced onto them by circumstances or reluctantly done from a sense of moral obligation. The trust officers are professional trustees, experienced in the requirements and appropriate procedures for administering a trust. An individual trustee, no matter how knowledgeable, is generally an "amateur" trustee. The bank brings experience and knowledge in investments generally and trust investments in particular. Will the individual trustee know what investments are appropriate for a trust? Will the individual trustee understand the distinction between income for tax purposes and income for trust purposes? Will the individual trustee keep current on investments, taxes, the law of trusts, etc.? Will the individual trustee know how to keep appropriate records for the trust? The bank trust officers will be aware of all these items and will act accordingly.
Continuity - Will the individual trustee that you select be available to serve at the appropriate time and will he or she continue to be available during the entire term of the trust? If the trust is for the benefit of your young children and is to last for many years, will your contemporaries be too old to serve as trustees? Do you have enough individuals in whom you have confidence to name alternate trustees in addition to the original trustees? If you name a bank as a trustee, although the particular individual trust officer may change from time to time, the "trustee" will always be there.
Objective Exercise of Discretion - It is often difficult to be objective, particularly where different beneficiaries have different and opposing interests or where emotional relationships are involved. Your trust might be structured to provide income to your spouse for life with the remainder to pass to your children. Your spouse might want the principal invested to maximize income - for example, exclusively in tax-free municipal bonds. Your children might want the principal invested to maximize growth - for example, exclusively in equity securities. This might be a more contentious issue where there is a second marriage and there are adult children from the first marriage. Your trustee has to exercise discretion to reach a fair compromise between the interests of all beneficiaries. Will your individual trustee be up to this task? What if your trustee feels closer to your children than your spouse - will your spouse be treated fairly or will the emotional relationship result in unfair subjective exercise of the trustee's discretion? The bank trust department deals with these types of decision every day. The decisions can still be difficult but the bank is well-equipped to handle them. It might be appropriate under certain circumstances to seek to convert the trust to a unitrust to eliminate this conflict between the different beneficiaries (See related article about trusts for an explanation of a unitrust). Will your individual trustee be aware of that possible alternative or know how to evaluate such a decision or how to bring it about? Professional trusr personnel are sensitive to these issues.
Avoiding Conflicts of Interest - An individual trustee might have an inherent conflict of interest if he or she is also a potential beneficiary. Consider the following situation, for example. Assume that you name your brother George as the trustee for your child. Also assume that the trust provides that if your child does not survive the term of the trust, George's children become the beneficiaries. Thus, the more trust funds that George spends on your child, the less that might be left for his own children if your child dies. This is a classic conflict of interest. George might be inclined to be frugal when using trust funds for your child, contrary to your intentions because he is also considering the interests of his own children. The bank trustee would have no such conflict.
Insulation for the Individual Trustees - Sometimes an individual trustee is placed in the difficult position of having to turn down the request of a beneficiary. This can be even more awkward when the trustee is also acting as the guardian of a minor beneficiary of the trust. For example, assume that you name your sister Mary both as the guardian of your minor children and as the trustee of his or her trust, and assume further that one of your children makes a request for money from the trust for a purpose that your sister deems inappropriate. It might be easier on your sister if she can respond by pointing out to the child that the bank trust officer must also approve the request. Having the bank as co-trustee, takes some of the "heat" off the individual trustee.
Protection Against Misappropriation of Funds - If you set up a trust for your children and if, despite your best efforts to select an honest trustee, the individual trustee steals money from your trust, will the beneficiaries - your children - be able to recover the stolen funds? If the trustee has spent all the money and does not have funds of his or her own to replace the missing funds, your children might never see the money. Selecting a close relative is no guarantee of honesty. There are numerous examples of individual trustees who have stolen money. If a bank is named as trustee, the likelihood of misappropriation is reduced because of checks and balances in the administration of the trust. However, even if there is a dishonest trust officer, the bank - presumably a financially secure institution - will be standing behind its trust officer and make good any losses that result from the dishonesty of the trust officer.
Summary - Not every trust is a good candidate to have a bank serve as trustee. Nevertheless, a person considering using a trust as part of her or his estate plan should not simply dismiss the notion of naming a bank as trustee or co-trustee. There are often many good reasons to name a bank as trustee. A careful consideration of both the advantages and disadvantages should be made before any decision is made. When discussing the use of a trust with your lawyer, you should also discuss these advantages and disadvantages before making a final decision.
Copyright 2013 - 2014 Marc H. Jaffe
Note - This article is only meant to provide general information about trustees in Pennsylvania. It is not an attempt to answer all the questions that may arise about trustees or using banks as trustees nor is it intended as legal advice. You should consult an attorney with your specific questions about the advisability of designating a bank as a trustee for your own situation.