CMP Financial Planning

Choosing a Corporate Trustee


 

For many parents choosing someone to look after their child with a disability is the most difficult part of their estate planning process. The chosen person must not only be responsible and committed to your child’s emotional and physical wellbeing but must also have the technical expertise to manage the child’s financial affairs. (The difficulty in selecting a Trustee for the SNT was addressed in the January 2017 Disability Insights article “How Do I Choose a Trustee for my Special Needs Trust?” -see http://conta.cc/2jKEKNR.)   For some parents choosing a professional trustee will make it easier in selecting and soliciting the right family member for involvement in the future affairs of the individual with a disability by lessening the responsibility and technical ability required of them to serve.  This article explores what services a professional trustee provides, the costs of those services and the pros and cons of hiring that professional.

What is a Corporate Trustee?

A corporate trustee is an entity that manages the trust set up for an individual according to the terms of the trust. Usually one thinks of these entities as banks but there are also entities that are simply “trust companies” whose sole business focus is administering trusts.  These entities have no interest in the assets in the trust.  They act on behalf of the beneficiary of the trust and manage assets within the trust according to the terms of the trust.

What Services Does the Corporate Trustee Provide?

A trustee of the Special Needs Trust (SNT), whether a family member or business entity, is required to provide a full accounting of all transactions made from the trust. The SNT may have to provide this accounting to the beneficiary, Social Security, Medicaid and the probate court where the individual resides.  The trustee is also required to manage the assets within the trust in the best interests of beneficiaries and according to trust terms. Services that the Corporate Trustee often provide include:  1) Record Keeping 2.) Bill paying 3.) Providing Account and Investment Statements 4.) Tax filings 5.) Portfolio and Asset management.

Most corporate trustees tie the trust administration (services #1 thru #4) with the investment management (service #1) of the trust. Others will work with the financial advisors of the family member who will manage the assets within the trust.

What are the Costs for Corporate Trustee Services?

Most banks or trust companies charge separately for trust administration and investment management services. Banks or trust companies charge an “Asset Under Management” (AUM) fee that ranges between .25% to 1% of assets for the administration of the trust depending on the size of the trust.   Typically the organization will adjust the fee depending on the size of the trust: the greater the size of the trust, the lower the AUM percentage fee.  In most cases this fee does not include filing of tax returns (which can cost between $350 to $1,000 per filing).  Vanguard charges a flat $2,500 trust administration fee that does not increase with the size of the trust.  In addition to the trust administration fee, the organization typically charges an investment management fee based on AUM.  Like the trust administration fee, the AUM fee typically decreases with size.  Fees can range from 0.5% to 1.25% of AUM.  Often trust companies will have asset minimums (e.g. assets > 500K) or annual fee minimums ranging from $1,000 to $5,000.

 

What are the Pros and Cons of Choosing a Corporate Trustee?

There are several benefits to naming a corporate trustee to manage the SNT.  The corporate trustee often provides professional financial and technical expertise that the guardian doesn’t have.  Even if the guardian does possess the skill and specialized knowledge needed to manage the trust, the corporate trustee can save the guardian significant time in the ongoing management of the trust.    Finally, having a corporate trustee helps eliminate potential conflicts of interest between the guardian and the beneficiary of the SNT.  The main downside of using the corporate trustee is cost.  For trusts with an AUM of less than $500K, annual fees can exceed 2% of trust assets.

In establishing an SNT it is important to consider who will be the named trustee or co-trustee of the trust. Although costs are always a consideration, the accounting and financial services that a corporate trustee provides may reduce the barrier of involvement of family members who may be wary of assuming too much responsibility for the individual with special needs.  Even with a professional trustee family members can and should retain an important role in managing the financial affairs of the child with special needs since they know they know the needs and desires of their loved one better than a trust professional.   Employing the use of a corporate trustee, along with involvement of family members can help ensure that individual needs are well provided for through the special needs trust.

By Barry Jamieson