The benefits of doing a living trust and transferring your assets into the trust during life are many. A primary benefit is that your estate will circumvent the probate process when you pass, if you do things right, saving your loved ones many months of administrative burdens, delays, attorney’s fees and other costs. You also can gain greater control of your estate with a trust.
When you set up a living trust, you continue to own your own assets, but you own them “in trust”. You are the trustee and the beneficiary and, therefore, you continue to control your assets as you did before. You are simply adding a layer to your ownership (the trust), but you have lost no control.
Another key advantage of a trust is that you can name successor trustees who will take over when you can no longer manage your own affairs, either during life or upon death. This creates continuity and efficiency. When you can no longer manage your affairs, the trustee you have named as your successor will take over and carry on the instructions of your trust through the remainder of your life and after you are gone.
Naming your successor trustee (or multiple trustees in some order of succession) is an important decision for you to make. Many people naturally want to name spouses or other family members. Every once in a while, I have clients who want to name friends. Another choice that should be given consideration is a corporate trustee.
Family relationships can be complex and give rise to awkward and sometimes tense relationships. I have noticed that my clients are not always in tune with the nuances of their family dynamics. Maybe people are too close with family for them to see these issues. People get used to them; the issues may be been muted for years, lying dormant. If there are any family issues, they inevitably arise when a loved one dies.
Perhaps, we fail to see these issues for what they are because we want to believe the best about our loved ones. However, I have seen family situations that a client thought was healthy, devolve into unhealthy, awkward and very difficult situations after death. This is something to consider when naming a trustee.
Family or friends may not be willing and able to take on the fiduciary role of a trustee when the time comes. Life circumstances change. People may not understand the burdens of the fiduciary duty and all that goes with it, including the legal responsibilities. Individuals may not appreciate the requirement of preparing and distributing accountings every year, which requires tracking every monetary move they make. Family members or friends who are also beneficiaries of the trust may not be able to separate their self-interests from their fiduciary responsibilities to the rest of the beneficiaries of the trust. Individuals also die and become incapacitated.
For all these reasons, naming a corporate trustee may make a lot of sense. Whether the corporate trustee is named at the outset or at the end of the line of successor trustees, a corporate trustee is not going to go anywhere. Even if a bank fails, another bank trust department will usually take over the assets and continue on with the fiduciary duties of the previous bank trust department. They know well the fiduciary duties with all the legal responsibilities that go with it, and they are well able to handle the accountings and other requirements.
Perhaps, the two most common reasons why people might balk at naming a corporate trustee are the seeming impersonal nature of a bank and the cost. The initial reaction to naming a corporate trustee, however, often diminishes after considering the benefits and addressing those concerns.
To begin with, bank trust departments are filled with people, and people carry out the roles of the trustee/fiduciary. Bank trust officers develop relationships with the people they serve and become a sort of surrogate family.
Sure, the surrogate bank trust family is not like a family member or friend, but they are usually friendly and that can be a good thing. All of the common tensions, jealousies, petty differences and emotions that often accompany family relationships are absent. A bank trust officer has one overarching duty, and that is to carry out the terms of the trust for the benefit of the beneficiaries objectively and without favoritism and to comply with all the requirements of the law. Whereas, an older sister, for example, may find it awkward acting as trustee of a younger brother’s assets and making discretionary decisions that might be second guessed or not appreciated by the younger brother because of the familial relationship, a bank trust officer will not be burdened by those emotional issues.
Bank trust departments do charge for their services. Of course, individuals have a right to be compensated also, though sometimes they do not choose to take that compensation. Though banks will charge for their services, they also have a fiduciary duty to invest the assets and to maximize the growth of those assets. Bank trust departments have particular expertise in making safe investments within the bounds of the law that will grow the value of the assets in their control.
Bank trust departments will not only handle the investments, they will handle of the administrative burdens, do the accountings and see that all the requirements of the law are met. Individuals often don’t appreciate or realize what all is involved and often will fail to do the necessary things that are required of a fiduciary.
A person might counter that financial advisors can do the same thing. That is only partly true. Financial advisors can handle the investments, but financial advisors are not fiduciaries like bank trust departments. They do not take on the additional burdens of the trustee. They do not take responsibility to carry out the terms of the trust. They do not make discretionary decisions about the assets in the trust. They do not handle the filing of tax returns or the preparation of accountings that are required.
To that extent, you get double the bang for the buck when you appoint a bank trust department as trustee. Not only do you get all of the investment expertise that you would get from a financial planner, but you get all of the fiduciary expertise, an administrator for the trust, discretionary decision making according to the trust terms, tax preparation, accountings, and everything that a trustee is required to do by law.
Your estate would pay a financial advisor to invest your assets anyway, unless your individual trustee handles the investments on his or her own. Individuals, however, are not often aware of the very strict rules that govern trust fiduciaries in regard to making investments. Many investments are simply off limits, legally, because they are considered to be too risky, and not many individuals have the expertise of professional investors. An individual who does have that kind of expertise is likely going to charge accordingly. At the very least, they are not likely to be aware of all of the duties and responsibilities that go with being a fiduciary.
With a corporate trustee, you get both the investment expertise and the administrative expertise and skills that go with handling a trust and the personnel to carry out those duties. You would pay for the financial investment expertise anyway. After considering all of these things, the fees that banks charge to be trustee are outweighed by all that a bank trustee provides to a trust. You get the added value of trust administration expertise that takes the burden away from your beneficiaries and family members and friends.
There is an added benefit as well. Fiduciary accounts are not considered assets of the bank. Unlike deposit accounts, which are only insured up to $250,000.00 (under the Dodd-Frank Act), trust and fiduciary accounts are not subject to the bank’s creditors.
That means, if a bank fails, you do not lose your trust and fiduciary accounts that the bank is holding. The FDIC will come in and make sure that another bank takes over those accounts and carries on all of the duties and responsibilities of the bank, if it fails. If you had an individual trustee who had large deposits held by banks, in CD’s or otherwise, anything over the $250,000.00 threshold could be lost if the bank failed.
For all of these and other reasons, anyone setting up a living trust for the purpose of estate planning should consider naming a corporate fiduciary, either as the initial successor trustee, as co-trustee or as the final successor trustee. I find that people are much more comfortable, initially, with the thought of naming a family member or a friend. If you dig a little deeper, however, and think through the ramifications, the idea of naming a corporate trustee begins to look more appealing. Though a corporate trustee will charge for its services, you would pay an investment advisor to charge for overseeing investments anyway, and a corporate trustee provides the added value of undertaking all of the administrative and fiduciary burdens.Kevin G. Drendel Drendel & Jansons Law Group 111 Flinn Street Batavia, IL 60510 (630) 406-5440 (630) 406-6179 fax [email protected] foxvalleyestateplanning.com