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As I wrote in Advisor Perspectives in September of 2018 (The Question Every Advisor Hopes Their Clients Ask), there is a simple metric all advisors can rely on with certainty that indicates they have a client who will remain loyal through the most difficult of times and market conditions. Surprisingly, it is not linked to investment performance or market returns, but rather comes in the form of a direct request from your client:
Would you consider being named as the successor trustee in my trust if something happens to me?
The article went on to discuss the importance of your response as well as the associated liabilities and ramifications if you are unprepared for the question.
Let’s examine in greater detail the ensuing successor-trustee conversation with clients should you be presented with the question, or better yet proactively introduce it with your client.
Increasingly, in their drafting and consulting role for clients, trust and estate attorneys typically recommend clients avoid friends and family members for the successor trustee role. More often they support and recommend the use of an “advisor-friendly” corporate trustee. Via a quick web search, their reasons for this have become well documented with several of the most common being: Flexibility, expertise, continuity, lack of bias, professional governance, and regulatory oversight.
Although each of these can present a significant challenge for an unprepared friend or family member, many clients will have a difficult time denying or overlooking these pitfalls and shortcomings. As is often the case in the field of financial services, clients’ major hurdle is most often one of cost – where the client’s objection often sounds like:
“Why should I pay a trust company to do something my family member can do for free?” or,
“What exactly does a trust company do to earn their fee that my family member or friend can’t do?”
Here, the age-old adage of “you get what you pay for” often applies. Free is rarely free, when one examines the inevitable roadkill that litters the highway of individual trustees who thought they were doing their family member or friend a favor by saving or eliminating corporate trustee fees for the beneficiaries and trust.
That being said, free is still free, and many clients simply refuse to believe the value a corporate trustee provides significantly exceeds the cost incurred by their trust and ultimate beneficiaries.
For trusts with values in the range of $1-5 million, a traditional bank/trust company typically charges a trustee fee in the range of 1% (100 basis points (bps)) in addition to an asset management fee that often includes their use of proprietary investment products. In contrast to this “bundled and one-size-fits-all” model, independent financial advisors in partnership with an unbundled, advisor-friendly corporate trustee who allows them to manage the trust assets will typically reduce the traditional corporate trustee fee in half from 1% to 0.5% (100 bps to 50 bps).
Let’s do the math on an advisor-friendly corporate trustee fee of 50 bps versus the family member or friend who has agreed to assume the trustee role for free. Additionally, it is important to distinguish both the direct cost to the trust as well as the indirect cost of distributions to the grantor’s named beneficiary(s).
Many irrevocable trusts, in addition to mandatory net-income distributions, allow the trustee to make discretionary principal distributions to the beneficiaries for health (H), education (E), maintenance (M), and support (S), commonly referred to as HEMS provisions. As trustees are held to a fiduciary standard to manage and administer the trust for both current and future beneficiaries, it is common practice for the total mandatory plus discretionary distribution rate to be modelled after the financial industry’s annual “safe withdrawal” rate of 3-4% of the trust assets.
The direct annual advisor-friendly trustee fee to the trust per $1 million of trust assets will be 0.5% (50 bps) x $1,000,000 or $5,000. Assuming the trustee follows a total beneficiary distribution rate of 4% of trust assets, the indirect reduction on the distribution to the beneficiary(s) is 4% x $5,000, or $200 annually.
As the vast majority of irrevocable trusts fall in the $1-5 million range, grantors quickly realize a $200-$1,000 reduction in beneficiary distributions is an outstanding trade-off for the value a corporate trustee provides as well as the avoidance of burdening a family member or friend with a fiduciary trustee role in which they likely do not possess the core competencies required.
Despite the inflationary environment triggering many to seek cheaper alternatives, your client’s choice of a successor trustee shouldn’t be marginalized. During the deliberation of selecting a successor trustee for their estate plan, your ability to highlight the actual versus perceived cost of an advisor-friendly corporate trustee not only provides great value to your clients but also assures you will continue to have a voice should your client become incapacitated or die.
As a founding member of one of the original “advisor friendly” independent trust companies in 1991 and widely considered a pioneer in this rapidly expanding arena, Mike Flinn consults with advisors in the strategies and questions necessary to engage clients in the successor trustee dialogue. During his career, he has enabled advisors to capture and manage over $6 billion in new trust assets.
Read more articles by Mike Flinn