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There's Fiduciary And Then There's Corporate Fiduciary

April 6, 2017

Wealth management with us is a bit different.

When a financial professional provides investment advice, one of two different standards applies:

1. the recommendation is "suitable" for the client; or
2. the recommendation is "in the client's best interest."

To the layman, the difference in these two statements may not seem like much. To lawyers and regulators, there is a world of difference. Standard 1 has been in general use among stockbrokers. Standard 2 is the "fiduciary" standard.

The Dodd-Frank legislation required the Securities and Exchange Commission to study the pros and cons of putting all investment advisors on Standard 2, the fiduciary standard. The SEC never reached a final conclusion. But in the meantime, the Department of Labor got into the picture with a ruling of its own. The DOL decided that Standard 2 would apply whenever investment advice was provided with respect to qualified retirement assets, such as an IRA or an IRA rollover. The expansion of the fiduciary standard is scheduled to take effect in April 2017. There is some question whether that will happen, given the change in administrations. Those in the trust industry are not affected by these developments, for the simple reason that we already are governed by fiduciary standards and always have been. You might say that we were the pioneers of fiduciary responsibility. 

What's more, being held to a fiduciary standard in giving investment advice is not the same as being able to exercise fiduciary powers. That is something we, as a "corporate fiduciary," can do, and we do it every day. See Fiduciary Standards versus Fiduciary Powers on page two for examples. When might you want to turn to a corporate fiduciary, such as us, for help with your wealth management issues? To sum up, we offer: 

  • Professional Investment Management

  • Experience in Estate Settlement

  • Unbiased Trust Administration 

When is a trust appropriate?

Trusts can be used to achieve some or all of the following objectives:

  • Provide lifetime financial protection for a surviving spouse

  • Establish inheritance management for minors, and incapacitated or disabled family members

  • Protect assets from creditors

  • Reduce or eliminate transfer taxes

  • Increase financial privacy and confidentiality regarding wealth distribution

  • Implement a program of philanthropy

  • Protect an estate plan from claims by disgruntled heirs

  • Provide complete financial management in the event of your own incapacity

Whatever the reason for creating your trust, the next question is crucial: Whom should you choose as your trustee? Who has the qualifications to see to it that your trust plan will succeed? Where would you look for the right trustee? Typically, a trust granter is deciding between a corporate fiduciary (a company that has been granted the legal right to act as a trustee, such as us) and an individual, such as a
family member, friend or business associate. Factors that should be considered include:

Judgment and experience. Inexperienced trustees may dissipate the trust assets, or make administrative mistakes that result in delay or other problems.

Impartiality. A trust typically has current income beneficiaries and future or remainder beneficiaries. The interests of both types of beneficiaries must be balanced carefully. Conflicts need to be resolved by a trustee that all the beneficiaries can respect.

Investment sophistication. The Uniform Prudent Investor Act and other laws governing the investment of trust assets must be adhered to. The trustee should be able to increase returns or reduce portfolio volatility, and must be able to diversify the portfolio.

Permanence and availability. Many trusts are expected to last a decade or more. Corporate trustees have the advantage of perpetual existence.

Sensitivity to individual beneficiaries' needs. Understanding the individual needs of trust beneficiaries is very important, and on this issue many will assume that the friend or family member has the advantage. This is not necessarily the case, but sometimes an individual will be made co-trustee to handle such decisions. Even so, a corporate trustee might be brought into the process for an objective voice and to prevent unreasonable distributions. 

Accounting and recordkeeping. Detailed trust records are required, and few individuals are equipped to handle this chore properly. 

Fees. There is a chance that the fees charged for trust administration will be lower when a friend or family member is named as trustee. However, when a trustee is serving for little or no compensation, it becomes hard to give the trust the attention that it deserves. 

In the usual case, the trust assets consist of ordinary investment assets, such as stocks, bonds or mutual funds. In that situation, a corporate trustee is likely to be a very cost-effective alternative. 

Special considerations 

In addition to the personal characteristics, there are situations in which having an independent and professional trustee will be important. 

Potential for self-dealing. Will the trustee be purchasing assets from related parties or affiliates? The trustee should not be on both sides of these transactions, and many states have statutory restrictions on self-dealing.

Power to allocate gains to income. The Uniform Principal and Income Act. which applies in many states, permits (but does not require) the trustee to allocate realized capital gains to income. In a trust that distributes all of its income every year, such as a marital deduction trust. the trustee will be greatly favoring the income beneficiary by allocating gains to income. Such a decision should not be made.

Discretionary distributions. If the goal of the trust is to provide for long-term protection against the squandering of an inheritance, the best course may be to have an independent corporate trustee with wide discretion over distributions. Such an approach minimizes the chance that the beneficiary might be able to force a distribution through the courts.

Can we tell you more? 

We are well qualified for all the tasks of trusteeship. It is a job that we do every day, with our full attention. We are staffed for it, experienced and always ready to serve. 

When you are ready to take the serious step of including a trust in your long-term financial and wealth management plans, please call upon us to learn more about how we may be of service to you. 

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