Why Most Trust Settlors Dismiss Naming A Corporate Trustee

When someone sets up their estate and they don’t want to drop a lump sum of an inheritance into an heir’s lap, they must designate a trustee who will oversee the trust for that heir.

For example, let’s say Fred has accumulated assets and is now realizing that his daughter Pebbles will likely inherit somewhere around $3 million. But since Pebbles hasn’t made the wisest financial decisions during her lifetime, Fred doesn’t want to dump $3 million into Pebbles’ lap. So the conversation then turns to Fred leaving Pebbles’ inheritance to a trust for Pebbles so that Pebbles’ inheritance will be doled out to Pebbles over time instead of given to her in one big lump sum. In addition to Fred deciding when Pebbles can get distributions from the trust, Fred also must decide who will be the trustee of that trust after Fred dies. The trustee’s duties, after Fred dies, would be to see that the trust assets are appropriately invested, keep records, provide accountings to Pebbles, and make distributions from the trust to or for Pebbles in accordance with the terms of the trust instrument.

Fred is presented with options regarding who should be the trustee of this trust after Fred dies. Fred realizes that, among his options, he can appoint an individual trustee or a corporate trustee. Fred’s first thought is to name his best friend, Barney, as the trustee of Pebbles’ trust. In the back of Fred’s mind, Fred is thinking that Barney would serve as trustee of Pebbles trust without compensation, so that all of the trust income and principal could be used for Pebbles’ needs. Yes, Barney would likely need to get an accountant to do trust accounting annually, but Barney could use the trust assets to cover that expense. And Barney may hire a financial advisor to help Barney invest the trust funds. And if for some reason Barney couldn’t be the trustee in the future, then perhaps Fred would provide that Barney’s wife, Betty, could be the backup trustee.

But Fred’s not sure if he wants to put all of that trustee burden on Barney (or Betty) after Fred dies. And Fred also has in the back of his mind that Barney and Betty are about the same age as Fred, and Barney and Betty may not be around when Fred dies and a trustee is needed. So Fred wants to know if he has other options regarding his trustee designation. Fred then discovers that he could designate, instead of an individual trustee like Barney, Fred could appoint a corporate trustee to handle these trustee duties after Fred dies. Fred, like most people, upon hearing the term "corporate trustee," Fred quickly dismisses this corporate trustee option for the same reason that many people dismiss appointing a corporate trustee - corporate trustees charge corporate trustee fees and the general population gets irritated by that.

But since the fees that corporate trustees charge turn off many people who set up trusts, it’s worth taking a closer look at what those trustee fees might be. I looked online at the trustee fees for a $3 million trust when Vanguard National Trust Company serves as a trustee of a trust. I could have picked one of the many corporate trust companies out there but Vanguard’s fee schedule is easily accessible online - but I don’t want to make this a praise or bash Vanguard article - I’m just using them as an example because many of our national estate planning law firm clients have accounts at Vanguard. Vanguard is, however, generally considered to be a low-cost provider so the trustee compensation of other corporate trust companies are likely to be a bit higher. But if Fred designates that when he dies, that Vanguard National Trust Company will serve as the trustee of Pebbles $3 million trust, then their total annual fee, which includes an annual trust administration fee plus an annual advisory fee combined would be 0.55% of the balance of the trust portfolio, which if the trust portfolio is worth $3 million, then the annual corporate trustee compensation would be $16,500.?

Now, let’s compare those corporate trustee fees to what the fees would be if Fred’s best friend, Barney is the trustee. We know that there may be a couple of thousand dollars of tax filings and reporting to beneficiaries each year - I don’t know what that number will be - you can plug in whatever number you think is appropriate. But where the trust could get hit hard with fees - even when an individual is a trustee - is if Barney sets up a trust account with his financial advisor who charges based on the assets under management. This account would be titled something like, “Barney, as trustee of the Pebbles Trust.” And while Barney is not required to hire a financial advisor and Barney can make all of the investment decisions himself on a no account management fee platform, Barney may feel better protected from future potential trustee liability if he does hire a financial advisor to recommend appropriate trust investments. And if Barney’s financial advisor charges, let’s say, an annual fee of 0.8%, then Barney’s financial advisor will collect a fee of $24,000 from the trust portfolio, which is significantly more than Vanguard National Trust Company would collect for doing both the advisory portion and the trust administration portion. The trust administration fee, by the way, covers trust consulting, principal and income reporting, tax preparation and filing, beneficiary communications, and related administrative services.

So my point here is that if you are going to establish a trust so that your heirs will receive their inheritance over time instead of in one big lump sum, then if you want to name an individual (a trusted relative or friend, for example) as the trustee of that trust, by all means - go for it. But the individual that you appoint as a trustee may never have been a trustee before and will likely have to suffer through a learning curve on the job as they interpret trust provisions, comply with accounting and trust reporting rules, communicate with beneficiaries, and handle the other related administrative services. Now sometimes that individual trustee you designate may better understand the needs of the beneficiaries, at least better than a corporate trustee might, and that individual trustee, who has perhaps a longstanding relationship with the beneficiaries, may be better at using that trustee discretion to make distributions to or for a beneficiary for the beneficiary’s health, education, maintenance and support.

But corporate trustees are, generally speaking, better at handling the administrative functions of a trustee - more so than an individual trustee who has little or no experience serving as a trustee. And the point here is that someone may not be making a fully informed decision when they just immediately and completely dismiss the possibility of selecting a corporate trustee (for the sole reason that “they charge fees”) when the circumstances might warrant a corporate trustee, even though they charge fees, and that corporate trustee may be, under Fred’s family circumstances, what is best for the future welfare of Fred’s child Barney and any other beneficiaries.

Now I realize that your corporate trustee selection options are limited when the trust assets to be managed by a trustee are not in the millions of dollars. Then, your only option if you want to leave assets to a trust may be an individual trustee. But I don’t think that people should so quickly dismiss even considering a corporate trustee solely because “they charge fees.”