One of the biggest planning issues facing our client families is determining the appropriate succession of trustees and/or co-trustees to meet a family’s objectives for generations to come. To make thoughtful and individual family recommendations, we performed a thorough analysis of possible trustee solutions and welcome the opportunity to share our thoughts with each of our families. In the meantime, here are some highlights on what should be considered during the trust planning and trustee selection process along with each option’s impact on families.
Trustee selections range from:
- Individual family member to non-family individuals
- Corporate trust companies
- Private trust companies
- Or some combination of the above
Considerations in determining the best trustee solutions include:
- Estate taxes: in some cases, a beneficiary and/or related family member may not be able to serve as trustee because doing so causes the assets to be included in the taxable estate of the beneficiary serving as trustee.
- Income taxes: each state has different methods for determining whether a trust should be income taxable. Taxes can be affected by where the trust is located as well as by where the trustee lives.
- Asset protection: Trust assets can provide creditor protection, particularly in cases where a beneficiary or family member is not the trustee.
- Continuity of Trust: Naming family members of the next generation to be trustees may or may not alter the original long-term intent of the patriarch/matriarch who establishes the long-term trust.
Based on the four bullet points above, it may be unwise to “hard code” family members from future generations as trustees given the potential adverse tax and asset protection consequences that can arise from where they choose to live or powers they possess as trustee.
Possible Trustee Solutions/Considerations
Qualified professional advisor: Many professionals are trusted and clear about their fiduciary duties, but when they eventually move or retire, a new trustee must be selected, and transferring a trusteeship requires a significant amount of administrative time and expenses.
Trusted Family friend: Many families trust a long-time friend who may or may not appreciate their fiduciary duty and separate his/her role as a “friend of the family,” especially when a fiduciary decision is required that may be unpopular with members of the family.
Corporate Trustee: Corporate trustees have many benefits and, as a result, have been a common option for trust management.
- They are corporations and can serve in perpetuity.
- They possess knowledge and expertise to administer trust appropriately.
- Most possess an internal investment function.
- Corporations can be bought and sold, so the institution, its service level and philosophy can change.
- Corporate trustees tend to have a corporate-wide approach regarding how trusts are managed, and that philosophy can evolve in a different direction from that intended by the family.
- Corporate trustees tend to have internal investment functions that are “plain vanilla,” designed to serve all of the company’s clients as opposed to finding “best in class” managers and vetting appropriate alternative investments.
- State income tax planning can play a huge role in where a trust is located, and that may need to change over time depending on the evolution of the client family. Client families may eventually need trusts located in different states, resulting in several different trustees, all of whom may have different ways of doing things.
Offer an Argos Trust Company
Benefits include: From Argos’ perspective, this is a positive choice because it creates an even stronger bond with the family.
- From the client perspective, however, it makes it even more challenging and costly should the family ever decide to remove Argos as a corporate trustee.
- As previously stated, state income tax planning can have a huge impact on the location of trusts and the trustees. Argos would have to select a state for its trust company that works best for as many of its client families as possible, but that location may not be the best for every single family either now or in the future.
New Solution: Establish Private Trust Companies (a Family/non-Family Hybrid) for each of our clients who needs them. Popular among many ultra-high net worth families, a private trust company serves a single (or very few) families and is usually owned by long-term trusts set up by the family solely for this purpose.
- The family hires and staffs the private trust company so continuity of the family’s goals and philosophies is more likely.
- Argos can help each family select the state that best fits a client’s need based on tax, flexibility, privacy, asset protection and cost considerations.
- The private trust company outsources its operation to Argos Family Office and retain Argos Investment Advisors as its investment advisor so the family’s service level from Argos does not change.
- Each family has the flexibility to include individual family members or other trusted advisors in the investment, administration and exercise of discretion functions as it sees fit.
- Clients can more easily remove Argos from service should they so desire. Of course, we wouldn’t want this to happen, but we also want to make sure our clients have a choice.
- Argos will need to continue to demonstrate its value to the family, because switching advisors can occur more easily than switching trustees.