A Remedy with Side Effects Understand the Administrative Issues Before Choosing a Trust
Like most efficacious remedies, trusts have side effects.
‘Side effects?’ you say. ‘But everyone uses them. How much of a problem can they be?’ The answer is ‘big.’ But you have to need the remedy.
Here are a few circumstances when trusts may be needed:
• Holding assets for young or disabled people, or people who may need help managing assets for any reason;
• Keeping assets together for an extended period for family business or wealth-accumulation purposes;
• Tax minimization if you expect to be subject to estate taxes; and
• Making certain types of charitable gifts in which you or your family retain an income or remainder interest.
So, what are the problems and side effects? There are many. For example:
• There is a cost to having a trust drafted properly for your purposes;
• You will have to pick a willing, capable, affordable trustee and provide for a substitute or a method of selecting one if the trustee you named can’t or won’t serve;
• Bank trustees are generally competent and provide continuity in the trustee role. But unless a trust is very large (more than several million dollars), bank trustees’ fees tend to be substantial relative to the amount held in the trust, and many banks charge additional amounts when a trust terminates and money is to be distributed. Larger banks tend not to accept smaller trusts.
• If you name a bank trustee, you will probably want to find an individual to serve as co-trustee, although that isn’t absolutely necessary. Very few individuals understand and can do the job of a co-trustee. Using a co-trustee to serve with the bank puts the co-trustee in a tough position. Banks must fulfill their trustee responsibilities to avoid liability, and they are understandably reluctant to share those responsibilities.
Co-trustees have the difficult task of holding the bank to task on performance as well as bringing to bear their own judgment on trust matters, and that requires substantial knowledge and experience.
It can be difficult for an individual co-trustee to acquire the skills needed. Individual co-trustees are generally entitled to charge for the time and responsibility involved in serving. If they do charge for serving, their cost is in addition to the bank trustee’s charge.
Also, a bank trustee generally requires committee approval for discretionary distributions, which can make beneficiaries wait longer, and often make them have to provide more justification, than they would like.
Individuals who serve as trustees without bank co-trustees are rarely knowledgeable enough to competently perform all of the tasks required of trustees and are likely to muddle along doing only what they know how to do and ignore the rest. This can get them in a lot of trouble and make them an easy target for disgruntled beneficiaries. They can hire the services they aren’t competent to render, but they have to understand what they aren’t doing and what services to buy.
Most individuals serving without a bank co-trustee will at a minimum need to consult with an investment advisor, an accountant, and a lawyer on an ongoing basis.
When you need a trust, you should create one, but before you do, you should talk to your lawyer about all relevant trust administrative issues and how to approach solving them.
As we said, the trust is a remedy with side effects, and you have to need the remedy.
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