A question of trustee succession

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Mikejenny
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A question of trustee succession

Post by Mikejenny » Mon Jun 21, 2010 1:12 pm

Trustee sequence

Last week, we had our first meeting with an attorney who was recommended to us as someone who has expertise in estate planning. Among the many things he suggested we consider, one was to think about a revocable trust for myself and a separate one for my wife. He thinks I should be the trustee for my revocable trust and my wife for her trust. He recommends my wife be my “successor trustee” and I serve as her “successor trustee”. So far, so good.

His next question started us thinking: If there were to be a common disaster which eliminated both of us (my wife and I) together, who (or what organization) would we want to be the alternate successor trustee?

Our thought was to have our daughter (age 28 and still single) serve as alternate successor trustee. He said that was OK but asked what we would want if she was also impacted in the common disaster- or she succumbed to a separate disaster. He generally suggested we consider some sort of a “corporate trustee” as an ultimate back-up for the trusts. He also mentioned that sometimes folks who agree to serve as alternate successor trustees find that once they have to administer the trust (and complete/file the related documents) they do not have the time, ability or expertise to accomplish all the things required of them. However, a corporate trustee would always be able to serve. We really hadn’t given any of this much thought.

So, our question: Is this sequence of successor trustees pretty common and is something other Bogleheads have done? Should we identify our daughter as “primary alternate successor trustee” and a bank trust department as “secondary alternate successor trustee”? Is this sequence something which a bank trust department (or anyone- like Vanguard) would agree to? Or is there another way to do this?

Mike

GoshenGuy57
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Succession question

Post by GoshenGuy57 » Mon Jun 21, 2010 2:09 pm

I've heard of alternate successor trustees (I think the NOLO books use that phrase) but not the specific designations as primary and secondary. To me, your intent is clear but in my experience lawyers have a peculiar way of confounding the interpretation of common English.
I guess my thought is whether the use of "primary" would be the most effective way to convey what you and your wife want done. Would "back-up alternative successor trustee" make your intent more absolutely clear than "secondary alternative successor trustee"?
Goshen

sscritic
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Re: A question of trustee succession

Post by sscritic » Mon Jun 21, 2010 2:28 pm

Mikejenny wrote:Trustee sequence

Last week, we had our first meeting with an attorney who was recommended to us as someone who has expertise in estate planning. Among the many things he suggested we consider, one was to think about a revocable trust for myself and a separate one for my wife. He thinks I should be the trustee for my revocable trust and my wife for her trust. He recommends my wife be my “successor trustee” and I serve as her “successor trustee”. So far, so good.

His next question started us thinking: If there were to be a common disaster which eliminated both of us (my wife and I) together, who (or what organization) would we want to be the alternate successor trustee?
When does your trust terminate? For most people, it ends at death or for married couples, at the last death. If both you and your wife are "eliminated" in a common disaster, then the trustee only needs to distribute the trust in accordance with its terms.

In my case (I am not married), "in the event of the death, inability, or unwillingness of [me] to act, then [my sister] shall be the Trustee. In the event of the death, inability, or unwillingness of [my sister] to serve, then [my children] shall be successor Co-Trustees."

My sister was executor of my mother's estate, is trustee of her two trusts, and is successor trustee of my father's trust and named executor of his estate. I have instructed her (and told my children) that I would like her to serve if I should die in the next 10 (now 8) years, but once my children are both forty, she should become "unwilling" and pass the duties on to them.

What is going to happen to the assets in the trust if you, your wife, and daughter all die at the same time? Is there a trust for grandchildren for which a trustee will be required or will it just be a matter of distributing all your assets to charity? In my case, I have grandchildren, but if at least one child survives me, that child will be trustee for the trusts for the then living children of my deceased child (i.e., for his or her nieces and nephews). I think that goes far enough into the future without worrying about every possible contingency.

jcompton
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Re: A question of trustee succession

Post by jcompton » Mon Jun 21, 2010 3:08 pm

sscritic wrote: In my case (I am not married), "in the event of the death, inability, or unwillingness of [me] to act, then [my sister] shall be the Trustee. In the event of the death, inability, or unwillingness of [my sister] to serve, then [my children] shall be successor Co-Trustees."
Seconded. This is how I have seen it done.

And the fallback to a corporate trustee is not uncommon. I have seen specific banks named, or banks with a capitalization above $X, or "a bank or other financial institution to be named by (attorney who drafted the trust)." I don't believe there is any limit to the number of "in the event of" clauses, so you could name a string of any number of people you would trust in that role before it defaults to a bank.

JDCPAEsq
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Post by JDCPAEsq » Mon Jun 21, 2010 6:35 pm

A corporate trustee is the only entity with perpetual existence that is in the business of acting as a professional trustee. Not only will it be around to serve, it has the benefit of experience, group judgment, impartiality, financial responsibility and the appointment often eliminates the need to hire other professionals to perform certain functions for the trust. No one individual offers all these benefits.

The role of a trustee is not an honorary position. It is a job that requires knowledge and experience. Your attorney is giving you good advice to consider a corporate trustee in this role.
John

bluemarlin08
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Post by bluemarlin08 » Tue Jun 22, 2010 7:36 am

Your attorney is giving excellent advice.

sscritic
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Post by sscritic » Tue Jun 22, 2010 8:13 am

bluemarlin08 wrote:Your attorney is giving excellent advice.
I don't follow your reasons since I don't see any.

I think the size and expected duration of the trust matter. If the trust has $50 thousand in assets and is expected to last for 5 months after my death, I don't think you need a corporate trustee that will be around for 50 years. On the other hand, if the trust has $50 billion in assets and is expected to be around for 500 years, I wouldn't name a corporate trustee. I would set up a board of trustees, a CEO, a CFO, etc. in the manner of the Bill and Melinda Gates Foundation.
Bill Gates, Co-chair
Melinda French Gates, Co-chair
William H. Gates Sr., Co-chair
Jeff Raikes, Chief Executive Officer
Warren Buffett, Trustee
Allan C. Golston, President, United States Program
Dr. Tadataka “Tachi” Yamada, President, Global Health Program
Sylvia Mathews Burwell, President, Global Development Program
Richard Henriques, Chief Financial Officer, Operations
Connie Collingsworth, General Counsel
Martha Choe, Chief Administrative Officer
Geoff Lamb, Managing Director of Public Policy
Franci Phelan, Chief Human Resources Officer
Kate James, Chief Communications Officer
Dale Christian, Chief Information Officer
Patty Stonesifer, Senior Advisor to the Trustees
Number of employees: approximately 830
Asset trust endowment: $35.2 billion

Latecomer
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Post by Latecomer » Tue Jun 22, 2010 8:13 am

Thanks for this thread! Does anyone have recommendations for a sound, stable corporate trustee?

JDCPAEsq
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Post by JDCPAEsq » Tue Jun 22, 2010 9:55 am

sscritic wrote:I would set up a board of trustees, a CEO, a CFO, etc. in the manner of the Bill and Melinda Gates Foundation.
sscritic - I'm sure you know the difference bettween a private foundation for charity and a private trust. The OP is talking about a private trust for family members, not charity.

Yes, if there is enough wealth involved a private trust company, not a foundation, can be formed, much as the Rockefeller and other families have done. Your advice isn't helpful to the OP. A corporate trustee can play a vital role is smaller short term trusts as well as larger trusts that last generations. As I posted above, there is no entity or individual that can offer the attributes of a good corporate trustee.

I know your position on trust institutions, as you have often responded in the same manner when I have indicated one might be considered in a particular situation. You would seem to take the position one is never indicated. Generations of intelligent individuals have felt otherwise as have the beneficiaries of their planning.
John

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Post by bluemarlin08 » Tue Jun 22, 2010 10:32 am

Having seen the negative impact of some individual trustees on estate assets over the years, I totally disagree. As discussed in the book "Beyond the Grave" who is going to watch the trustee? Recently involved in a case where a son in law, who is a CPA, was named as trustee. Through crazy investing and him making personal loans, the trust has been almost depleted.
Granted, one pays for a corporate trustee, but I believe the expense is well worth it to have a professional in this role. You may disagree, everyone has their own opinion. Have you ever witnessed Trustee incompetence/misconduct?

JDCPAEsq
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Post by JDCPAEsq » Tue Jun 22, 2010 10:34 am

Latecomer wrote:Thanks for this thread! Does anyone have recommendations for a sound, stable corporate trustee?
Vanguard Trust Company would be a good choice. I've used them personally.
John
Last edited by JDCPAEsq on Sat Sep 11, 2010 4:06 pm, edited 1 time in total.

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Post by JDCPAEsq » Tue Jun 22, 2010 10:36 am

bluemarlin08 wrote:Having seen the negative impact of some individual trustees on estate assets over the years, I totally disagree. As discussed in the book "Beyond the Grave" who is going to watch the trustee? Recently involved in a case where a son in law, who is a CPA, was named as trustee. Through crazy investing and him making personal loans, the trust has been almost depleted.
Granted, one pays for a corporate trustee, but I believe the expense is well worth it to have a professional in this role. You may disagree, everyone has their own opinion. Have you ever witnessed Trustee incompetence/misconduct?
I assume you're replying to sscritic.
John

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Post by sscritic » Tue Jun 22, 2010 10:37 am

JDCPAEsq wrote: Yes, if there is enough wealth involved a private trust company, not a foundation, can be formed, much as the Rockefeller and other families have done. Your advice isn't helpful to the OP. A corporate trustee can play a vital role is smaller short term trusts as well as larger trusts that last generations. As I posted above, there is no entity or individual that can offer the attributes of a good corporate trustee.

I know your position on trust institutions, as you have often responded in the same manner when I have indicated one might be considered in a particular situation. You would seem to take the position one is never indicated. Generations of intelligent individuals have felt otherwise as have the beneficiaries of their planning.
John
John:

I think you over-state my position. I think that many estates and trusts can be handled by normal individuals who are detail oriented (they run in my family). But I agree with you that a trust institution could be a solution where such people are not available. In the OP's case, he is willing to name his single 28 year old daughter as trustee.

There are two possibilities: she is perfectly capable of doing the job or she is not. If she is not, then naming her before the trust institution doesn't make sense. If she is, she is also capable of hiring help as needed, including naming a trust institution as her successor trustee. In my trust the last in the line of successor trustees has the power to name a further successor, or, failing that, the remaining beneficiaries are granted the power to name one, which could be a trust institution.

Would it really be unreasonable for the OP to leave the choice to his daughter whom he trusts or to the remaining beneficiaries if she also is struck by lightning?

P.S. I just saw bluemarlin08's post.

If you are worried about individuals serving as trustees, then the OP should not name his daughter as successor trustee, nor even his wife. If you want a professional trustee, make that institution the first trustee, not the third or fourth in line of succession.

shawcroft
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Estate planning

Post by shawcroft » Tue Jun 22, 2010 4:56 pm

What a great discussion. I've been thinking about this type of thing for some time and hadn't got my questions together. Looks like Mike started things so let me add something.
We met with an estate attorney a few months ago- he wanted us to gather all the "stuff" we had and list it- insurance policies, savings bonds, individual stock and mutual funds, IRA's, 401K's and (VERY IMPORTANT) note precisely how they were titled and who (if anyone) was the beneficiary.
What an exercise!
It is easy to start stuff- hard to keep track of it. The biggest surprise was the need to correct/make consistent the beneficiaries on various things. Also, some stuff was titled with nicknames ( Jimmy A., not James A) so we had to fix that.
He also had us do something which struck me as odd at first- estimate how much we needed each year (income) to maintain our current lifestyle- he called this the annual "rate of burn". When I asked what this was for, he said it was to approximate our annual income need in retirement and see if what we are likely to have come in would meet what we are likely to have go out.
Maybe not an answer to your trustee question but some things which I thought were very practical. Actually, very obvious things to do once you think about it.
Let me think if I can add to the trustee discussion in a later message
Shawcroft

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Rick Ferri
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Post by Rick Ferri » Tue Jun 22, 2010 5:24 pm

If your children are trustworthy and competent, I'm sure they'll make wonderful successor trustees. Keep the money and the decisions in the family.

Professional trustees are fine providing there's absolutely no conflict of interest in how your money will be managed. Unfortunately, despite trust law that requires trustees to be fiduciaries, unbiased and unattached investment advice is rare in the professional trustee business. The big fees are in money management, not trustee fees. Every professional trustee knows this, and many, MANY have no issue putting your money in high cost products and services that benefit them or the companies they work for either directly or indirectly.

I'm not saying don't hire a professional trustee. Just be very selective, and know that deep conflicts of interest can and do exist.

Rick Ferri

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Post by livesoft » Tue Jun 22, 2010 6:30 pm

^So could one pick a corporate trustee -- say Vanguard Trust, since it was mentioned -- and stipulate that a different money management firm was used -- say Rick Ferri & Co. -- in order to avoid conflicts of interest? Or would the trust company not want to be trustee in such cases?

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Post by smackboy1 » Tue Jun 22, 2010 6:35 pm

When it comes to things like this I like to hope for the best, but plan for the worst. FWIW I think your lawyer is giving you good advice. One should always plan for remote possibilities by having backup trustees, executors, beneficiaries etc.. The following is not in any particular order but is just food for thought:

- The last serving trustee could name their successor either while they are alive or in their will;
- A majority of the surviving beneficiaries/trustees could vote for a trustee;
- Someone could serve as a trust protector who would be given the power to appoint a new trustee. The trust protector could also have oversight of a corporate trustee;
- The chair of the estates and trusts department of your law firm (or it's successor) could name a new trustee.

Another thing, it's not as if the trust will explode if the list of successor trustees runs out. If all else fails a court can appoint a trustee.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

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Post by bluemarlin08 » Tue Jun 22, 2010 7:31 pm

shawcroft,
If one's attorney doesn't do what your's did they can't give you the best advice. When our clients meet with the attorney they have all this information in a booklet so the attorney doesn't need to spend lots of billable time putting the info together. Many planning firms offer this service.

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Post by JDCPAEsq » Tue Jun 22, 2010 7:40 pm

Rick Ferri wrote:Unfortunately, despite trust law that requires trustees to be fiduciaries, unbiased and unattached investment advice is rare in the professional trustee business. The big fees are in money management, not trustee fees. Every professional trustee knows this, and many, MANY have no issue putting your money in high cost products and services that benefit them or the companies they work for either directly or indirectly.

I'm not saying don't hire a professional trustee. Just be very selective, and know that deep conflicts of interest can and do exist.

Rick Ferri
Rick - I have a lot of respect for your investment judgment, but I'm afraid you totally missed the mark on this one. When you designate a corporate trustee you normally want them to manage the assets as well as provide the other administrative duties of a trustee. It would be very rare that you would want to relieve the trustee of investment responsibility.

What do you mean by saying the fees are in money management, not trustee fees? A trustee receives only one fee - a trustee fee and is not permitted to collect any form of money management fee in addition to this.

Furthermore, in my 35 years in the trust business I dealt with internal trust investment committees, internal auditors, boards of directors, external auditors, state regulators, federal regulators, courts and beneficiaries, all of whom had as one of their objectives being sure there was no conflict of interest or double dipping on the part of the corporate trustee. How you can imply that trust institutions are self dealing for their own interests in the face of this oversight is simply ludicrous.
John
Last edited by JDCPAEsq on Tue Jun 22, 2010 8:11 pm, edited 2 times in total.

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Post by JDCPAEsq » Tue Jun 22, 2010 7:44 pm

livesoft wrote:^So could one pick a corporate trustee -- say Vanguard Trust, since it was mentioned -- and stipulate that a different money management firm was used -- say Rick Ferri & Co. -- in order to avoid conflicts of interest? Or would the trust company not want to be trustee in such cases?
No the trust company would not accept such a trust. I can remember such an arrangement being proposed at times and we always declined the appointment, feeling that we, as trustee, would retain some residual investment responsibility while having no authority over the asset management.
John

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Post by Rick Ferri » Tue Jun 22, 2010 9:31 pm

JDCPAEsq wrote:Rick - I have a lot of respect for your investment judgment, but I'm afraid you totally missed the mark on this one. When you designate a corporate trustee you normally want them to manage the assets as well as provide the other administrative duties of a trustee. It would be very rare that you would want to relieve the trustee of investment responsibility.

What do you mean by saying the fees are in money management, not trustee fees? A trustee receives only one fee - a trustee fee and is not permitted to collect any form of money management fee in addition to this.
I am not suggesting that the trustee be relieved of their investment responsibility. I am suggesting that many trustees are not acting as a fiduciary on the investment side. Many are biased. They're working in their own best interest or the interest of their firm.

This is a self-serving post, but I'll say it anyway. My company, Portfolio Solutions, manages money for 0.25% per year. The expenses of the index funds and ETFs we use average 0.17%. Trading costs are a couple of hundred dollars. All totaled, client's pay less than 0.45% for everything.

Since professional trustees are supposed to watch costs and do what's in the best interest of the trust, you would think they would be interested in a low-fee investment manager, such as Portfolio Solutions, who IS a fiduciary in writing on all client accounts. But, do we get referrals from professional trustees? Nope. Not-a-one. No money to the low cost investment manager.

Where does the trust money go? It goes to expensive bank trust funds and to places like Merrill Lynch and Smith Barney. It gets placed it mediocre-at-best mutual funds and pooled investments that 'the trust company' manages. Why does this occur? Because the trustee is affiliated with those firms, or is benefiting in some way from investing with Merrill or Smith Barney or whomever.

Trustees are supposed to take fees and performance into consideration when managing other people's money. That means use index funds for the most part (see anything written by Scott Simon about the 3rd restatement of trust). All the academic data points to this strategy as the highest probability, lowest cost approach.

But that's not what happens. Most of the time professional trustees routinely place money with the beat-the-market high cost investment providers, even though there is NO EVIDENCE whatsoever that this approach is the the best interest of the trust.

So, either these professional trustees are just plain stupid, which I doubt, or their getting their back scratched somehow. Could be referrals. Could be benefits that are paid in soft-dollars. Could be fees from other accounts not associated with the trust. It's something.

There are too many cozy relationships between professional trustees and the investment firms managing the assets, and doing so very poorly. I've seen it dozens of times in my 20 plus years in the investment industry. It's a clear-as-day problem that gets far to little press.

If a trustee was truly acting as a fiduciary they would have no relationship with the asset manager and not benefit professionally in any way. Not even through professional referrals.

Rick Ferri

PS. For those trustees who invest in index funds through Vanguard or other low-cost providers, BRAVO! You are a true fiduciary. I honor and respect you.

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Post by bluemarlin08 » Tue Jun 22, 2010 10:04 pm

Totally agree with Rick's assessment. However, with no accountability for ind trustees, the risk for mismanagement and fraud are at least as paramount as the conflict of interest with corp. fid. don't you think?

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Post by Rick Ferri » Tue Jun 22, 2010 10:13 pm

bluemarlin08 wrote:Totally agree with Rick's assessment. However, with no accountability for ind trustees, the risk for mismanagement and fraud are at least as paramount as the conflict of interest with corp. fid. don't you think?
Agreed. And you can add Taft-Hartley plans to the list. :wink:

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trustees in stock exchange or FINRA member firm

Post by Sotol » Tue Jun 22, 2010 11:16 pm

They must invest in the firm's business, may not even be allowed themselves to open an external account without special permission from their compliance department. This is another reason why a potential client needs to get clear clarification of company policy, and not 'just' focus on the potential trustee's alleged expertise. Would you have your laundry done by the mob owned company?

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Mikejenny
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Wow- what a discussion

Post by Mikejenny » Wed Jun 23, 2010 8:58 am

Wow! What a great series of thoughts and experiences in these messages. Had some computer problems so I’m late with a reply.
What I thought was a simple question really led to lots of additional questions. Let me expand on this.

During our initial (and only so far) meeting with our estate attorney he sort of figured out I had some Boglehead behaviors. So, he gave us a whole lot of stuff to do (like shawcroft mentioned) and suggested we talk to local banks about trust services. He listed about 7 of them (usual suspects- JPMorgan, Wells Fargo, Bank of America, HSBC, TD bank and two other regional banks) but didn’t mentioned Fidelity, Schwab, or Vanguard. (I had thought about Vabnguard- should we consider Fidelity?) He didn’t want to tilt the scale to any specific bank. Once we found organizations which appeared compatible with us, he said he would review our list and sort of list them in his order of preference. I think we have a Socratic-style lawyer here.

Our daughter isn’t a Boglehead yet but we’ve been talking and she is getting the idea. Probably too soon to have her the sole alternate successor trustee and so maybe allowing her (with the assistance of the executor) to select a corporate trustee if she feels “in under her head” would be OK. I didn't know you could build that flexibility into the trust. That might have come out in the next discussion with the attorney.

SScritic: Your comment on when do we want the trust to terminate is a great point. We hope for grandchildren someday (and our daughter does have a “steady guy”) but no marriage action appears imminent. They both have careers under development.

John: Your view of the likely benefits from having a corporate trustee as at least a back-up somewhere in the plan was very helpful. Vanguard does offer the service- we need to look into that further.

Bluemarlin: Your message on the downside of an inexperienced or unwatched individual trustee blowing away trust assets provided another helpful and troubling viewpoint. None of these decisions are easy.

Rick: Your messages really intrigued me, particularly the second one which mentioned that trustees who were truly acting as fiduciaries would not have any relationship to the asset manager. That is, professional trustees should seek the low cost investment manager and it would not be likely to be their own . If somehow your organization was overlooked, in theory others sort of offering somewhat similar low cost services (perhaps Larry Swedroe, Allan Roth, others like them) should see an inflow of these trust funds. Wonder if they have?- my suspicion is, like you, they haven’t.

We have much more to do- thanks for the messages. I’ll try to update this as we progress along.

Mike

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Post by JDCPAEsq » Wed Jun 23, 2010 3:16 pm

Rick Ferri wrote:There are too many cozy relationships between professional trustees and the investment firms managing the assets, and doing so very poorly. I've seen it dozens of times in my 20 plus years in the investment industry. It's a clear-as-day problem that gets far to (sic) little press.

If a trustee was truly acting as a fiduciary they would have no relationship with the asset manager and not benefit professionally in any way. Not even through professional referrals.
Rick - I really don't know what you are talking about here. Perhaps you are talking about corporate trustees who hire an outside asset manager. I am talking about major trust institutions, one of which I retired from as an Executive Vice President and COO. These trust companies manage the assets themselves. No outside entity manages them for the trustee. Accordingly, there is no outside asset manager to have a cozy relationship with.

Furthermore, are you aware that there are many more services bundled into a trustee's fee other than investment management. You are comparing apples and oranges when you compare a trustee's fee with your firms's.

I've beat this drum on this forum for eleven years and I probably will again, but that's enough for this thread.

John

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Post by Buysider » Wed Jun 23, 2010 3:35 pm

These trust companies manage the assets themselves. No outside entity manages them for the trustee. Accordingly, there is no outside asset manager to have a cozy relationship with.
How do they determine that their internal manager is the most effective and efficient asset manager for their clients? Most trust banks I've seen have moved to "open architecture" over the past 15 years as they could no longer say with a straight face that they had the "best" asset management capabilities for every asset class. I'm not saying they've hired better outside managers, but the conflict of interest is there, whether with what Rick talks about, or if the assets are 100% internal.
Furthermore, are you aware that there are many more services bundled into a trustee's fee other than investment management. You are comparing apples and oranges when you compare a trustee's fee with your firms's
Just like mutual funds, when you buy a Merrill Lynch mutual fund, you get much more than just exposure to stocks, you can a broker to talk to, etc., etc., and an expense ratio 6x that of Vanguard. But I do understand your point - a trustee using "bad" mutual funds may still preferable to a 21 year old getting they money all at once for themselves.

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Thoughts on Trustees

Post by shawcroft » Wed Jun 23, 2010 9:48 pm

This thread had had some really interesting comments.
Our estate attorney thinks it is OK to have family members serve as the trustee(s) for short-term stuff, maybe 1-3 years as things wind up. He feels a corporate trustee is better if the trust is going to last for 10-20 years. He thinks someone who has their head screwed on correctly might not need the help of a professional trustee. While they should be able to handle a trust lasting 10-20 years, he hasn’t seen very many individual ( non-professional) trustees who have done it well.
There are apparently tax forms and accountings things to do each year that could challenge an individual- or they would have to hire the services and that might cost more than the corporate trustee.
Rick Ferri makes a good point that there may be some soft dollars subtly lubricating things in SOME organizations. In deference to John (our esteemed legal colleague), I will not color all banks or trust companies with the same dark paint. However, Rick’s observation is certainly a reason for curiosity and worthy of further examination.
We are also looking at revocable trusts and will be exploring the use of the Vanguard Trust Company. I’ve talked to a few banks recently but didn’t have John, Rick, and Buysider’s useful perspectives in mind when I did. Time to visit them again with a few more direct questions.
My wife likes the idea of having some one to meet face to face when discussing questions about trusts, rather than relying upon the telephone. Once my wife had expressed that idea during our initial meetings, the three trust departments we spoke with really hammered that point throughout the rest of the conversation and the “sales pitch” really got into gear at one place.
OK, here’s my really dumb question: How often does someone realistically need to visit a local trust office and have a face–to-face meeting about a trust? I mean something which cannot be handled in any other way except by a direct meeting.
John has had decades of experience in trust matters and mentioned using Vanguard and he is in Florida- that’s a bit of distance from Valley Forge. We are in Southern New England- certainly a reasonable drive to Pennsylvania. Has anyone actually visited the Vanguard Trust office in Pennsylvania? Can someone actually do that? Do you need a Boglehead visa on your passport to gain entry?
Shawcroft

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Re: Thoughts on Trustees

Post by JDCPAEsq » Thu Jun 24, 2010 4:28 pm

shawcroft wrote:OK, here’s my really dumb question: How often does someone realistically need to visit a local trust office and have a face–to-face meeting about a trust? I mean something which cannot be handled in any other way except by a direct meeting.
The answer to this depends on the individual's relationship to the trust. While the grantor of a revocable living trust is living and still interested in financial matters, it would be normal to meet several times a year to review the trust management and have lunch. On the other end of the spectrum, might be a beneficiary who simply receives the income from a trust and might have no interest in meeting at all. We managed trusts for the benefit of people and institutions all over the world. There is no reason that I can see that you must consider a trustee whose office is right around the corner from you.
John

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Post by Rick Ferri » Thu Jun 24, 2010 5:24 pm

While the grantor of a revocable living trust is living and still interested in financial matters, it would be normal to meet several times a year to review the trust management and have lunch.
Those are some mighty expensive lunches! :lol: What could you possibly talk about?

I agree it's important to talk with your trust officer on occasion to ensure that 'financial matters' are being taken care of. I would disagree if these meetings are being done for the purpose of discussing investments and performance. That's not necessary for a prudently managed trust that uses select very low-cost index funds as part of a long-term asset allocation. Talking about the investment strategy once every 3-5 years would be adequate, unless something has dramatically changed with the grantor or the beneficiaries.

Perhaps less meetings, fewer lunches, and lower fees would be a good business model for an aspiring trustee?

Rick Ferri

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Post by JDCPAEsq » Thu Jun 24, 2010 6:52 pm

Rick Ferri wrote:Those are some mighty expensive lunches! :lol: What could you possibly talk about?

I agree it's important to talk with your trust officer on occasion to ensure that 'financial matters' are being taken care of. I would disagree if these meetings are being done for the purpose of discussing investments and performance. That's not necessary for a prudently managed trust that uses select very low-cost index funds as part of a long-term asset allocation. Talking about the investment strategy once every 3-5 years would be adequate, unless something has dramatically changed with the grantor or the beneficiaries.

Perhaps less meetings, fewer lunches, and lower fees would be a good business model for an aspiring trustee?

Rick Ferri
Rick - Let's have lunch, on you, and I'll fill you in on a few aspects of trust administration. There's a bit more involved than you seem to understand.
John

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Post by Rick Ferri » Thu Jun 24, 2010 8:06 pm

JDCPAEsq,

Don't get me wrong. I'm not against professional trustees. I've worked with several, and have I referred plenty of clients and non-clients to professional trustees. I know there's a lot to do and a lot of responsibility.

My only issue is on the investment side where, as I stated above, there should be absolute separation between the trustee and the investment company hired to manage the trust assets. There should be no conflict of interest what-so-ever. How else can a professional trustee actually be a fiduciary?

Rick Ferri
Last edited by Rick Ferri on Fri Jun 25, 2010 6:59 am, edited 1 time in total.

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Post by JDCPAEsq » Thu Jun 24, 2010 8:50 pm

Rick Ferri wrote:JDCPAEsq,

Don't get me wrong. I'm not a (sic) against professional trustees. I've worked with several, and have I (sic) referred plenty of client's (sic)and non-clients to professional trustees. I know there's a lot to do and a lot of responsibility.

My only issue is on the investment side where, as I stated above, there should be absolute separation between the trustee and the investment company hired to manage the trust assets. There should be no conflict of interest what-so-ever (sic). How else can a professional trustee actually be a fiduciary?

Rick Ferri
Rick - With all due respect to your 20 years experience, what are you talking about separating the trustee from the investment manager? In my experience, the trustee is the investment manager. We're obviously not speaking of the same arrangement. You're talking about rinky dink banks that hire out the investment management. I'm speaking of leading trust companies who are the trustee, investment manager, custodian and all the rest.
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Post by the intruder » Thu Jun 24, 2010 11:25 pm

Rick Ferri wrote:JDCPAEsq,

Don't get me wrong. I'm not a against professional trustees. I've worked with several, and have I referred plenty of client's and non-clients to professional trustees. I know there's a lot to do and a lot of responsibility.

My only issue is on the investment side where, as I stated above, there should be absolute separation between the trustee and the investment company hired to manage the trust assets. There should be no conflict of interest what-so-ever. How else can a professional trustee actually be a fiduciary?

Rick Ferri
What kind of trust arrangments are you thinking of? Banks and Trust companies are selected by clients because they provide professional asset management and professiosnal administration for the client's assets and act as a fiduciary for the beneficaries of the trust. Splitting up the role of trustee and investmement manager would double the cost of the trust and could be considered to be a waste of assets.

A trust company acting as a fiduciary for a trust is legally bound to act in the best interests of the beneficiaries in all of the duties it performs.

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Post by huskerblue » Thu Jun 24, 2010 11:36 pm

Intruder and JDCPA are on point.

The issues raised by some here show a lack of a grasp of the magnitude of the duties presented in a fiduciary situation.

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Post by Rick Ferri » Fri Jun 25, 2010 7:52 am

I can understand the concern from professional trustees on this site when I suggest that a fiduciary means being completely independent from the firm that's managing the investments in a trust. We all know this isn't possible for many trustees because the trustee and the investment manager are one in the same. Consequently, there's no way the trustee will ever fire the investment manager regardless how poorly the investments are being managed, or how high the fees are for this poor management.
Splitting up the role of trustee and investment manager would double the cost of the trust and could be considered to be a waste of assets.
That's completely false and misleading. A good trustee will ensure there's no extra cost to the trust when the two services are separate and independent. In fact, I argue that this is the only way trusts should be managed.
A trust company acting as a fiduciary for a trust is legally bound to act in the best interests of the beneficiaries in all of the duties it performs.
But they don't. A trustee who works for a trust company can NEVER fire the trust company for poor investment performance. Even though the trustee personally knows there are better investment alternatives available at lower costs. They're bound to the company they work for. Thus, trustees that work at trust companies that also manage money, by default, CANNOT be acting in their client's best interest at all times.

IMO, trustees and investment management of those trusts should be completely separate businesses with no conflicts of interest between the two, and that includes no referral or soft dollar arrangements. The trustee should select the most appropriate investment managers, negotiate fees with investment managers, monitor investment performance, and terminate agreements with any investment manager that does not perform well. All this should be done without ANY benefit to the trustee or the trust company aside from a straight trustee fee. THAT'S being independent. THAT'S being a fiduciary.

I'll get back to my point. In-house investment management should not exist. Only independent outside managers should be hired. This eliminates the conflict of interest that prevents trustees from firing poor performing in-house managers.

There are extremely low cost investment alternatives that have a much higher probability for achieving the objectives of trusts. Trustees who have the freedom to use these services are doing what's in their client's best interest and are acting as a fiduciary. Trustees who march to the orders of trust companies by placing clients money with poor performing in-house managers, and those who place money with outside investment firms where the trustee benefits in any way are in breach of their fiduciary responsibility.

Rick Ferri

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Post by Buysider » Fri Jun 25, 2010 8:23 am

I'm speaking of leading trust companies who are the trustee, investment manager, custodian and all the rest.
Not JP Morgan, not Northern Trust ...

I know lots of rinky-dink trust companies locally that manage the assets internally. They do that to justify higher fees. Even trust companies that claim not to be open architecture hire outside managers for a substantial % of the assets, including Bessemer Trust, Wilmington Trust, etc.

You can have a trust at JP Morgan and have 100% of the assets in Vanguard mutual funds. They don't like that, but they are set-up to handle it.

If you are unfortunate enough to have a trust at a bank with an internal investment management arm that doesn't do 3rd party management, you are going to be stuck with a more expensive, mediocre asset manager. Medicore because the trustee selects the manager, and they have a huge incentive to hire the internal manager, whether they are good (Bernstein, Bessemer) or bad (your rinky dink example, and almost every other trust department I have ever seen in my life).

+1 on what Rick says:
A trustee who works for a trust company can NEVER fire the trust company for poor investment performance.
Last edited by Buysider on Fri Jun 25, 2010 9:16 am, edited 1 time in total.

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Post by Bob's not my name » Fri Jun 25, 2010 9:03 am

Mike,

There's some good debate in this thread on trustees, and by people who know way more about trusts than I, but I still don't understand exactly what your situation is. How old are you and your wife? Is your daughter your only child and is she your only heir? You mention only revocable trusts but then you speak of a longstanding trust to benefit grandchildren -- does that mean your will and trust will bypass your daughter to yet unborn grandchildren for at least a portion of your estate?

I'm asking these questions because a common (I think) arrangement is (1) the parents leave everything to their children, per stirpes; (2) the revocable trust of the first parent to die becomes an irrevocable trust with the surviving spouse as beneficiary; (3) upon the surviving spouse's death everything in both spouses' trusts goes to the kids. If that is your situation, then your daughter gets everything, and passes on to any children she might have as she sees fit.

Also, if that's your situation, the "common disaster" would be "common" in a different sense: it's very common for the first spouse to die when the surviving spouse is already at an advanced age and not very capable of stepping in as survivor trustee. Furthermore, you may wish to consider having your daughter as co-trustee at some point when you feel her financial knowledge is sufficient and your age is advanced, so that she can act on your behalf and for your and your spouse's benefit when you are no longer readily able to do so.

I look forward to a thorough drubbing from the experts for these suggestions.

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Post by bluemarlin08 » Fri Jun 25, 2010 10:28 am

Who are some trust firms that only use outside money managers and only charge for trust services?

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Post by JDCPAEsq » Fri Jun 25, 2010 11:44 am

Rick Ferri wrote:But they don't. A trustee who works for a trust company can NEVER fire the trust company for poor investment performance. Even though the trustee personally knows there are better investment alternatives available at lower costs. They're bound to the company they work for. Thus, trustees that work at trust companies that also manage money, by default, CANNOT be acting in their client's best interest at all times.
Rick - This sentence says it all and confirms what I've said earlier; You don't know what you're talking about. The trust company is the trustee, not the guy you see sitting at the desk. There's no sense discussing this further with your limited knowledge of the workings of a corporate fiduciary.
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Post by Buysider » Fri Jun 25, 2010 12:08 pm

There's no sense discussing this further with your limited knowledge of the workings of a corporate fiduciary.
Style, not substance. Rick is upset that Bank of America or Wachovia Trust Departments, using their authority as trustees puts billions of dollars into high priced, underperforming mutual funds and separate accounts every year while claiming they are acting in the best interest of their trusts' beneficiaries.

This fits most bank trust departments and trust banks I've seen - if trust departments ever had to show GIPS-compliant performance numbers to their clients before they were selected as Trustee, the trust world would look a lot different. They don't, so that's why trust banks tend to have asset management arms with limited third party assets, because any consultant or real fiduciary looks at performance and fees first, not whether they are an affiliated entity in deciding to hire them.

I'm sure lots of trust officers are trying to do the right thing and don't view themselves as stealing from their clients. Merrill brokers, First Command life agents, etc., etc. feel the same way too. Just because they don't feel like they are doing wrong, doesn't mean that they shouldn't be held accountable for having an average investment management fee north of 100 bps when a combination of Vanguard mutual funds can do the same job for 15 bps.

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Post by Rick Ferri » Fri Jun 25, 2010 12:20 pm

JDCPAEsq wrote:
Rick Ferri wrote:But they don't. A trustee who works for a trust company can NEVER fire the trust company for poor investment performance. Even though the trustee personally knows there are better investment alternatives available at lower costs. They're bound to the company they work for. Thus, trustees that work at trust companies that also manage money, by default, CANNOT be acting in their client's best interest at all times.
Rick - This sentence says it all and confirms what I've said earlier; You don't know what you're talking about. The trust company is the trustee, not the guy you see sitting at the desk. There's no sense discussing this further with your limited knowledge of the workings of a corporate fiduciary.
John
Being a trustee should be an entirely separate service than the detailed investment management of trust assets, and in no way should those two services be done by the same company or an affiliate. Period. It's the ONLY why to ensure the trustee is completely unbiased in their investment management decisions. Trust officers should not be 'asset gatherers' for the investment management businesses inside trust companies. Trust companies should get paid a fee for being a trustee, and that's it! The asset management side should be outsourced, IMO, and only to investment companies that have NO financial relationship with the trust company so there is NO conflict of interest.

You can muddy the water if you wish by saying I have 'limited knowledge' about trust companies, but that doesn't change the gross conflict of interest that occurs when a trust officer at a trust company puts money into proprietary funds managed by their internal managers. This is no different than a brokerage firm selling in-house mutual funds or a financial planner promoting their own in-house investment management. At least with the broker there is only a suitability standard, so it's expected that the broker pitch higher cost in-house products. However, that's not the case with professional trustees and financial planners. They are expected to do ONLY what's in the client's best interest, which generally means NOT investing in-house because it's too costly, the performance is not very good, and the higher risk from active management strategies used in-house are generally not prudent.

We can argues about this all day, and you can sling mud until the cows come home, but that fact is, when it comes to the investment management of trust assets, many professional trustees are working in their own best interest, or in the best interest of their firms, not in the best interest of the client.

Rick Ferri

PS. One of my client's wanted to name me as the successor trustee on his sister's account. I told the client that if he did this, that the first thing I would do would be to terminated the sisters investment agreement with my firm. I could not be a successor trustee AND investment manager on the account. That would be a gross breach of my fiduciary duties. I could be one or the other, but not both. Knowing this, the client hired an independent professional successor trustee, and if my company is doing a good job, the professional trustee is to consider retaining our services when the day comes.

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Post by Bradley » Fri Jun 25, 2010 2:55 pm

Rick is correct. I have first hand experience with the high cost proprietary products used in my parents trust. It was by any measure a conflict of interest which cost my parents dearly.

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Post by JDCPAEsq » Fri Jun 25, 2010 4:31 pm

Bradley wrote:Rick is correct. I have first hand experience with the high cost proprietary products used in my parents trust. It was by any measure a conflict of interest which cost my parents dearly.
Bradley - Yes, there have been conflicts of interest in the management of trusts. Does the experience of you parents impugn the entire industry?
Did you seek redress from the trustee? Did you report it to the regulatory authorities?

Speaking of conflicts of interest. No one has any greater conflict than Rick in this discussion.
John

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Post by Rick Ferri » Fri Jun 25, 2010 9:22 pm

JDCPAEsq wrote:Speaking of conflicts of interest. No one has any greater conflict than Rick in this discussion.
John
I made it very clear in my initial posts that as a low cost investment manager and as a fiduciary that I had a conflict of interest in how trust money should be managed. What's interesting is how long it has taken you to admit that as a professional trustee your profession also has deep conflicts of interest.

My opinions have been expressed. You won't hear any more from me on this conversation.

Rick Ferri
Last edited by Rick Ferri on Mon Jun 28, 2010 10:02 am, edited 1 time in total.

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Trust

Post by Jungle Cat » Fri Jun 25, 2010 11:29 pm

My wife and I just finished our estate plans which were set up first for the benefit of each other; and then for our minor children. Just FYI this included five documents for each of us: Health Care Proxies, HIPAA Authorizations, Durable Powers of Attorney, Revocable Trusts and Wills.

The trusts were set up for the benefit of the other spouse and in case of our deaths we appointed one trustee and two alternate trustees. I asked the attorney why, after my death, my wife was not made the trustee of my trust. He said that you can but he was conservative and was afraid of tax questions/issues that may arise trustee and beneficiary of the trust were the same.

JC

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Post by celia » Sat Jun 26, 2010 4:04 am

Mike, I'm joining this conversation late, but wonder why your lawyer is suggesting that you and your wife have separate trusts instead of one trust in which you are both trustees. If you own a house and start up two trusts, are you going to re-title your deed as the house is to be owned by two trusts? Are you going to split all your assets so they can go into one or the other trust?

We created our trust about 20 years ago when the kids were small. We have a string of 5 or so successor trustees, in case the previous ones are unwilling or unable to serve. Our lawyer also suggested a corporate trustee at the end of the line which we went with. We didn't know of any but he had literature for a few places and we selected the one that looked the biggest and most financially secure.

About 5 years ago, we were rereading the trust to see if anything needed updating. I noticed that all the successor trustees (relatives) were still living at the same addresses listed in the trust. Since I had never been in contact with the corporate trustee, I figured it was time to get new information about them. I went online to get their current phone and address and couldn't find them! Further research found that they were taken over by another trust company, and it also is no longer in business. So much for having an entity that is always there!

But if you think about it for a few minutes, how many financial institutions have been closed or taken over in the last two years? If you were a customer at the time, you would have been notified, but if the institution was just a line item in someone's trust, how do they tell you they are closing?

not true:
JDCPAEsq wrote:A corporate trustee is the only entity with perpetual existence that is in the business of acting as a professional trustee.
DH occasionally suggests it may be time to change our trustees after 20 years since our parents are quite elderly, yet alert. But I don't think our kids are ready to become trustees as they've never made big investment decisions, bought or sold real estate, or coordinated or paid for expensive medical care. Of course, they could learn, but I don't think they should learn during a stressful time. They just need more financial experiences before they would be ready for this.

I think one or more of the beneficiaries would be a better trustee, as long as they have financial experience, integrity, and get along with the other beneficiaries, than a corporate trustee would be. They would care about the assets more since they have a vested interest in preserving them. And they also know the family dynamics and the needs of each individual.

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Post by JDCPAEsq » Sat Jun 26, 2010 5:41 am

Rick Ferri wrote:What's interesting is how long it has taken you at (sic) admit that as a professional trustee your profession also has deep conflicts of interest.
Rick - You apparently can't even read accurately. When did I admit that?
John

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Re: Trust

Post by bluemarlin08 » Sat Jun 26, 2010 7:25 am

I asked the attorney why, after my death, my wife was not made the trustee of my trust. He said that you can but he was conservative and was afraid of tax questions/issues that may arise trustee and beneficiary of the trust were the same.

JC[/quote]

As long as the trust is a revocable trust there are no adverse consequences having the trustee that is the beneficiary.


Celia,
Most trust documents have a clause that gives the beneficiaries the right to change corporate trustees within certain parameters.

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Two Trusts

Post by Jungle Cat » Sat Jun 26, 2010 10:02 am

Celia:

My wife and I actually had one trust that was set up years ago. A lot has happened since that time...so my wife and I wanted to update our estate plans.

Our net worth is approaching a million dollars so he said we needed to each have a trust as the estate tax (can not remember now federal or state or both) starts at a million dollars so to avoid taxes he recommended we both set up a trust and fund the trusts equally. That way two million can be sheltered.

JC

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