The Trust: A Remedy with Side Effects – Fall 2018

Like most efficacious remedies, trusts have side effects. “Side effects?” you say. “But everyone uses them. How much of a problem can they be?”

Big! 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; or
  • Making certain types of charitable gifts in which you or your family retain an income or remainder interest;

So, what are the problems/side effects?

  • You will pay to have the trust drafted, and you must be sure it is drafted properly for your purposes.
  • You will have to pick a willing, capable, affordable trustee and provide for a substitute if the original named trustee can’t or won’t serve.
  • Bank trustees are generally competent, and you have the comfort of knowing that there will be continuity in the trustee role. Unless a trust is very large (more than several million dollars), bank trustee 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, you will probably want to find an individual to serve as co-trustee, although that isn’t absolutely necessary. Very few individuals understand 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 utilizing their own judgement on trust matters, and that requires substantial knowledge and experience. It can be hard for an individual co-trustee to acquire the skills needed and then to adequately charge for the time and responsibility involved in serving.
  • A bank trustee generally requires committee approval for discretionary distributions, which can make beneficiaries wait longer, and often makes them have to provide more justification, than they would like.
  • Individuals who serve as trustees without corporate co-trustees are rarely knowledgeable enough to competently serve as trustees and are likely to muddle along doing only what they know how to do and ignore the rest. That 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 as trustee will at a minimum need 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 trustee administrative issues and how to approach solving them.

The Trust: A Remedy with Side Effects – Fall 2018
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