I work with people on matching their estate plans with their account registrations, beneficiary designations, and ultimate goals for asset distribution. As part of this dialogue, I am often asked whether it’s better to use an individual or a corporate trustee. When making this decision, here are some things to consider:
How complex are the trust assets?
As you think about potential trustees, consider the amount of work that currently goes into managing your investments. You likely meet with your investment team periodically. If you have significant alternative assets, you may also attend annual conferences to speak with private equity CEOs or pore over analytical research. Some investors spend considerable time managing active investment properties or other businesses. Everyone manages their investments differently; consider the complexity of your investments when selecting a trustee who may have to step in and run things on a moment’s notice (and then have to manage things indefinitely).
Trustees also have to deal with taxes. If you are leaving a trust for your children, for example, the trustee will be required to file an income tax return for the trust each year. Trust income tax brackets are compressed compared to tax brackets for individuals, so understanding and applying available tools to manage the trust taxable income is a critical part of the trustee role for some trusts.
How complex are the beneficiaries?
The trustee is often the gatekeeper between the trust assets and the beneficiary. When selecting a trustee, consider the beneficiary or beneficiaries. Do they have a good relationship with other family members and with each other? Are there any mental capacity issues, substance abuse problems, financial concerns, or other factors that may put an individual trustee in an uncomfortable position? If so, you may want to consider having a corporate trustee serve (or at least serve as co-trustee).
One of the most difficult things a trustee needs to do is to balance the interests of the current beneficiaries with the interests of remainder beneficiaries. This is especially true in blended families where the surviving spouse is a current beneficiary and the remainder beneficiaries include children that do not belong to the surviving spouse. The surviving spouse may try to spend down trust assets on living expenses rather than depleting his or her own assets (in order to preserve those assets outside of the trust that will pass to the surviving spouse’s children only). This sort of conflict can be very uncomfortable for a friend or family member to navigate and is a consideration when deciding whether or not to include a corporate trustee in your plans.
How complex is the trust?
Like many things in life, trusts can get complicated. It is worth considering the complications in your trust when selecting a trustee. Does your trust run for a long time and, if so, will your individual trustees likely be alive long enough to administer the trust? Do the annual distribution provisions call for complicated tax calculations? Will the trustee be juggling distributions to multiple beneficiaries? Are the assets large enough that income, estate, and/or generation-skipping taxes may be in play? These, and other factors specific to your trust, ought to be considered when selecting a trustee.
What is it going to cost?
Being a trustee can be a time-consuming process and many trustees are paid for this time. Most trust documents provide that the trustee may be compensated “reasonably” from trust assets. “Reasonable” is a hard word to define in this context; however, I have seen several instances in which an individual trustee looked to the probate code for guidance. The Oregon Probate Code provides a statutory fee schedule for a personal representative in ORS §116.173, which instructs the reader to compensate the personal representative as follows:
113.173(3)(a) Upon the property subject to the jurisdiction of the court:
(A) Seven percent of any sum not exceeding $1,000.
(B) Four percent of all above $1,000 and not exceeding $10,000.
(C) Three percent of all above $10,000 and not exceeding $50,000.
(D) Two percent of all above $50,000.
(b) One percent of the property, exclusive of life insurance proceeds, not subject to the jurisdiction of the court but reportable for Oregon estate tax or federal estate tax purposes.
Based on the above statute, an individual serving as Personal Representative in Oregon typically receives a fee in the neighborhood of 1-2% depending on the size and makeup of the assets. This is one benchmark an individual trustee may look to in determining a “reasonable” fee.
A corporate trustee, on the other hand, will provide you with a quoted fee structure, removing the vagueness of “reasonable.” If you are considering a corporate trustee, be sure to examine the cost structure and make sure you understand exactly what the corporate trustee will do, when they will do it, and how you will be charged for each part of the work.
We take a lot of pride in tying together our clients’ financial, tax, and legal lives. Along these lines, we talk with all of our clients about the eventual transfer of their assets to the next generations, as preparing now can save a lot of trouble (and taxes) when someone becomes incapacitated or dies. Part of this conversation is a discussion about the individuals or professionals who will handle things in the event of death or disability. Send us an email or give us a call if you’d like to discuss these elements of your plan.