Most people who create trusts for estate planning and asset protection purposes serve as their own trustees during life and then prefer family members to step in if they become incapacitated or to serve for trusts that continue after the grantor's death. Family member trustees keep things private and save money since professional trustees, whether a lawyer, a bank or a trust company, usually charge charge fees of 1.0% to 1.2% of the trust assets per year, often a higher percentage for smaller trusts -- under $1 million -- and a lower percentage for larger ones -- over $2 million.
The use of a professional trustee also means a loss of control for family members and sometimes a loss of continuity when the trust officers for a larger bank or trust company change over time. In addition, if an individual attorney is serving as trustee, there's a risk of a loss of continuity or a gap if the trustee falls ill, passes away, or retires.
Benefits of Professional Trustees
So, with all of these downsides of using a professional trustee, what are the advantages? And how can you mitigate some of the potential drawbacks?
- Burden Sharing. Serving as trustee is a big job and is a lot to ask of a family member. A professional trustee can take care of all the administrative work, allowing the family member to participate in any investment and distribution decisions that need to be made.
- Investment. Most non-professional investors do less well than the market as a whole. Countless times, we've seen trusts not invested or invested only in certificates of deposit because trustees are afraid to take any action. As a result, they have not participated in the bull market of the last decade. Other times, we've seen non-professionals overreact to the inevitable drop in the market. Getting professional help by itself can make up for the cost of a professional trustee.
- Bookkeeping. Bookkeeping and accounting are very important for trusts because the trustee is acting on behalf of the trust beneficiaries. They must be able to explain how they spent trust money. If they can't because their bookkeeping is sloppy, they may in fact have to reimburse the trust, even though they've never taken a dime of trust money or been paid a dime for their services.
- Taxes. You don't have to file a separate tax return for your own revocable trust, but you do if you're the trustee of a trust for someone else's benefit. These trust returns can be complicated and get even more complicated when the trustee fails to file returns and has to reconstruct what happened years after the fact.
- Neutrality. Trustees often have to make difficult decisions about distributions, balancing the current needs and desires of the beneficiaries, with their potential future needs and those of future beneficiaries. It's often easier for an independent, professional trustee to say "no" when necessary than a family member who will be sitting across the Thanksgiving table from the beneficiary. When a family member and a professional are serving as co-trustees, the family member can, in effect, blame the professional trustee, saying "I'd love to finance your trip to the Greek isles, but that bank guy just won't agree."
- Creditor and Divorce Protection. The law allows you to leave funds in trust for your children and grandchildren (or others) that will be available to them if needed but protected if they are sued, go bankrupt, or get divorced. The firewall these trusts create is stronger if the distribution decisions are made entirely by a disinterested, independent trustee.
- Continuity. While I alluded above to the potential problem of the personnel of a corporate trustee changing or something happening to an independent professional trustee, more often there's a risk of a loss of continuity when a family member serves as trustee. She may become ill, pass away, move to another state, get preoccupied by a new job or the illness of a family member, or run into personal difficulties of another sort. An individual professional who is part of a larger firm or a corporate trustee will continue indefinitely with no gap or chaos developing when the family member trustee can no longer serve for whatever reason.
Mitigation of Risks
For all of these reasons, I feel that professional trustees more than earn their keep. Full disclosure: I serve in this role. (You can read more about our Trustee Services here.) In addition, there are two ways to reduce or eliminate the risks of using professional trustees mentioned above:
- Have a family member co-trustee. That way beneficiaries are not only dealing with an impersonal professional who they may not know. Decisions will be made by the professional and the family member together, combining professional management with better communication and decisions that reflect the family's values.
- Include a mechanism to replace trustees. Despite the best laid plans, sometimes trustees don't work out, whether due to a change in corporate structure, for instance a local bank being bought out by a national one, or a clash of personalities. Your trust should give someone or a group of people the right to change trustees without having to go to court to prove that the trustee is acting badly or falling down on the job.
With these two protections in place, there's little risk in using a professional trustee and in doing so, you will ensure that your trust will achieve the results for which you created it in the first place. You can think of the annual fee as simply being a charge for insurance to protect your plan for your family.