Sole Trustee and Trust Protection Aspect

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LSLover
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Sole Trustee and Trust Protection Aspect

Post by LSLover »

My sister recently confided in me that she and her husband are preparing to meet with an estate attorney to set up two Revocable Living Trusts (his & hers) for the benefit of their only daughter. They live on the East Coast (non-community property state).

My understanding is that their combined after-tax assets are somewhere around $10M and for the asset-protection reasons they are concerned to make their adult married daughter the sole successor trustee. My sister and her husband want to name me and her (their daughter) as the successor co-trustees requiring unanimous decision on all disbursements. Outside of me and the daughter they don’t have anyone else they trust enough to be a successor co-trustee.

The problem is that I am a good deal older than both of them… So, here are the questions:

- Short of naming a corporate entity as a sole trustee or co-trustee (which while possible is not desirable due to costs involved), how can they reasonably protect the trust assets from the potential creditors AFTER I am gone and, hence, the daughter will become the only remaining trustee?

- If the daughter becomes the sole trustee, how would this weaken the protection aspect of the trust and should this even be an acceptable (from protection standpoint) consideration?

- If only one (daughter) trustee remains and if it does, in fact, weaken the protection aspect, should there be a condition in the trust that requires that there always have to be two co-trustees?

- I am aware of the option to give the daughter an ability to remove/replace her co-trustees but can this option be viable and exercised in a timely fashion if a creditor pops up unexpectedly out-of-nowhere while she is the sole trustee?
Lee_WSP
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Re: Sole Trustee and Trust Protection Aspect

Post by Lee_WSP »

IANYL

You should seek legal counsel in your own state for any legal advice specific to your situation.

1. The basic idea is to give the protectee effective control, but not complete control such that protectee cannot be forced to distribute assets because protectee is not given that power.

2. Depends on the state. A better question is why is she bankrupt in the first place? Divorce is much more of a threat. Also, it would go into her estate and be an issue for her heirs.

3. I would personally opt for something like this: Daughter is allowed to unilaterally distribute to herself enough from income and principal up to the HEMS standard. Any distributions in excess shall require the consent of a non-subordinate and non related trustee per the code. However, to be perfectly honest, protections from creditors is not my biggest worry. Protection from spouses and inclusion in the beneficiary’s estate are much bigger issues.
senex
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Re: Sole Trustee and Trust Protection Aspect

Post by senex »

This topic arises semi-regularly. You'll get lots of good commentary from Lee and other active or retired attorneys here, but in most legal questions, particularly in the fluid field of asset protection, "it depends."

Some experienced attorneys will not allow a beneficiary to become sole trustee, because of the possibility of weakening the asset protection. Others will. There is a fuzzy tradeoff between control & protection, that varies with time, location, and as the lawyers say, "facts and circumstances."

Regarding your last question, a big concept in asset protection is "fraudulent conveyance." If you protect assets *after* a threat becomes known, the courts can undo the protections. I don't know whether fraudulent conveyance would apply to "adding a cotrustee at the last minute." Whether or not it would today, I personally tend toward caution on such things. If I were a judge or legislator, and saw "last minute co-trustees" being used by trust fund kids to cheat on their obligations, I might disallow it.
Gill
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Re: Sole Trustee and Trust Protection Aspect

Post by Gill »

LSLover wrote: Sun Jul 18, 2021 12:55 pm - Short of naming a corporate entity as a sole trustee or co-trustee (which while possible is not desirable due to costs involved), how can they reasonably protect the trust assets from the potential creditors AFTER I am gone and, hence, the daughter will become the only remaining trustee?
With $10 million of assets they would be making a major mistake NOT to include a corporate trustee or co-trustee.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Topic Author
LSLover
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Re: Sole Trustee and Trust Protection Aspect

Post by LSLover »

Gill wrote: Mon Jul 19, 2021 11:37 am
LSLover wrote: Sun Jul 18, 2021 12:55 pm - Short of naming a corporate entity as a sole trustee or co-trustee (which while possible is not desirable due to costs involved), how can they reasonably protect the trust assets from the potential creditors AFTER I am gone and, hence, the daughter will become the only remaining trustee?
With $10 million of assets they would be making a major mistake NOT to include a corporate trustee or co-trustee.
Gill
Gill,

Which is the preferred option, a sole corporate trustee or corporate co-trustee?

Is there a difference in the costs involved?
Lee_WSP
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Re: Sole Trustee and Trust Protection Aspect

Post by Lee_WSP »

LSLover wrote: Mon Jul 19, 2021 11:50 am
Gill wrote: Mon Jul 19, 2021 11:37 am
LSLover wrote: Sun Jul 18, 2021 12:55 pm - Short of naming a corporate entity as a sole trustee or co-trustee (which while possible is not desirable due to costs involved), how can they reasonably protect the trust assets from the potential creditors AFTER I am gone and, hence, the daughter will become the only remaining trustee?
With $10 million of assets they would be making a major mistake NOT to include a corporate trustee or co-trustee.
Gill
Gill,

Which is the preferred option, a sole corporate trustee or corporate co-trustee?

Is there a difference in the costs involved?
A sole corp trustee is going to give the beneficiary no effective control over her own trust.

A co-corporate trustee will allow the beneficiary to have some or effective control over her trust.

Which you choose is a personal choice, but I am of the opinion that beneficiary’s should not be constrained without good reason.
Gill
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Re: Sole Trustee and Trust Protection Aspect

Post by Gill »

LSLover wrote: Mon Jul 19, 2021 11:50 am
Gill wrote: Mon Jul 19, 2021 11:37 am
LSLover wrote: Sun Jul 18, 2021 12:55 pm - Short of naming a corporate entity as a sole trustee or co-trustee (which while possible is not desirable due to costs involved), how can they reasonably protect the trust assets from the potential creditors AFTER I am gone and, hence, the daughter will become the only remaining trustee?
With $10 million of assets they would be making a major mistake NOT to include a corporate trustee or co-trustee.
Gill
Gill,

Which is the preferred option, a sole corporate trustee or corporate co-trustee?

Is there a difference in the costs involved?
There is no difference in the cost whether the corporate trustee serves alone or with an individual co-trustee although there could be exceptions of which I'm unaware. The choice really boils down to whether one wishes to have an individual sharing management of the trust. In either case all of the administrative and investment matters are handled by the corporate trustee with the approval of the individual co-trustee.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
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LSLover
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Re: Sole Trustee and Trust Protection Aspect

Post by LSLover »

Gill wrote: Mon Jul 19, 2021 1:52 pm
LSLover wrote: Mon Jul 19, 2021 11:50 am
Gill wrote: Mon Jul 19, 2021 11:37 am
LSLover wrote: Sun Jul 18, 2021 12:55 pm - Short of naming a corporate entity as a sole trustee or co-trustee (which while possible is not desirable due to costs involved), how can they reasonably protect the trust assets from the potential creditors AFTER I am gone and, hence, the daughter will become the only remaining trustee?
With $10 million of assets they would be making a major mistake NOT to include a corporate trustee or co-trustee.
Gill
Gill,

Which is the preferred option, a sole corporate trustee or corporate co-trustee?

Is there a difference in the costs involved?
There is no difference in the cost whether the corporate trustee serves alone or with an individual co-trustee although there could be exceptions of which I'm unaware. The choice really boils down to whether one wishes to have an individual sharing management of the trust. In either case all of the administrative and investment matters are handled by the corporate trustee with the approval of the individual co-trustee.
Gill
In order to mitigate the cost, can a typical bogglehead-like successor co-trustee handle investment management on her own while limiting the role of the corporate co-trustee to trust administration only for about $5K (provided the corporate co-trustee agrees to that)?

Seems like the investment management part of the corporate trustee function is vastly more expensive than the administration function, at least when it comes to $10M trust. Fidelity, for instance quoted 0.45% fee ($45K per year) for full service, while only $4,500 for just the administrative function. So, by eliminating the investment management part, there could be some significant annual saving.

What are the most challenging parts of the investment management that would compel the trustor to engage the corporate trustee in BOTH investment management AND trust administration?
bsteiner
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Re: Sole Trustee and Trust Protection Aspect

Post by bsteiner »

LSLover wrote: Mon Jul 19, 2021 2:34 pm ...
In order to mitigate the cost, can a typical boglehead-like successor co-trustee handle investment management on her own while limiting the role of the corporate co-trustee to trust administration only for about $5K (provided the corporate co-trustee agrees to that)?

Seems like the investment management part of the corporate trustee function is vastly more expensive than the administration function, at least when it comes to $10M trust. Fidelity, for instance quoted 0.45% fee ($45K per year) for full service, while only $4,500 for just the administrative function. So, by eliminating the investment management part, there could be some significant annual saving.

What are the most challenging parts of the investment management that would compel the trustor to engage the corporate trustee in BOTH investment management AND trust administration?
It need not be a successor trustee. It's hard to predict what will happen when an initial trustee ceases to act.

You could have an individual as an initial trustee together with a trust company that acts just as an administrative trustee. (Whoever handles the investments is a trustee even if you call him/her something else.)

However, that's not usually done for trusts for others. In those cases, people either name a bank or trust company as trustee or co-trustee, or they don't. When we have a trust company as an administrative trustee it's to obtain a particular result, usually someone in a high tax state creating a trust to avoid state income tax, or occasionally an asset protection trust where the trustee has to be in an asset protection jurisdiction.
Gill
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Re: Sole Trustee and Trust Protection Aspect

Post by Gill »

LSLover wrote: Mon Jul 19, 2021 2:34 pm In order to mitigate the cost, can a typical bogglehead-like successor co-trustee handle investment management on her own while limiting the role of the corporate co-trustee to trust administration only for about $5K (provided the corporate co-trustee agrees to that)?

Seems like the investment management part of the corporate trustee function is vastly more expensive than the administration function, at least when it comes to $10M trust. Fidelity, for instance quoted 0.45% fee ($45K per year) for full service, while only $4,500 for just the administrative function. So, by eliminating the investment management part, there could be some significant annual saving.

What are the most challenging parts of the investment management that would compel the trustor to engage the corporate trustee in BOTH investment management AND trust administration?
Not all trust companies will accept the arrangement you describe, in fact there are very few that will. The answer to your question boils down to whether there is an individual who you will trust to manage the trust investments and who you expect will outlive the duration of the trust and always be able to tend to the duties of the trust regardless of illness, vacations or other responsibilities.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Lee_WSP
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Re: Sole Trustee and Trust Protection Aspect

Post by Lee_WSP »

LSLover wrote: Mon Jul 19, 2021 2:34 pm
What are the most challenging parts of the investment management that would compel the trustor to engage the corporate trustee in BOTH investment management AND trust administration?
If you don't trust the beneficiary to manage the money correctly. If the beneficiary does not want to manage it herself. If the beneficiary is disabled in some way. Or any other estate planning reason.

If by trustor you mean yourself and a living revocable trust, there is no reason unless you are disabled or no longer wish to deal with that aspect of your life.

While it is Bogleheads 101 to manage our own investments, if you leave the forum, you will find that it's not exactly common to find someone who actually espouses and follows the principals espoused on the forum. A lot of people even willfully stick their heads in the sand.
BillWalters
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Re: Sole Trustee and Trust Protection Aspect

Post by BillWalters »

Based on personal experience, corporate co-trustee plus beneficiary power to remove and replace the corporate co-trustee is the way to go.

For a long time, I thought the trustee fees were just too high, especially when viewed on an opportunity cost basis. I no longer think this. How many people would you trust with $10 million?
oldfort
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Re: Sole Trustee and Trust Protection Aspect

Post by oldfort »

LSLover wrote: Sun Jul 18, 2021 12:55 pm if a creditor pops up unexpectedly out-of-nowhere while she is the sole trustee?
Creditors popping up unexpectedly out-of-nowhere are rarely the reason anyone loses their inheritance. A person is far more likely to lose a large part of their inheritance due to divorce/alimony/child support, excessive spending, poor investment decisions, or pledging their assets as collateral for a business loan, which they default on. Anyone with $10M in assets should be able to afford a lot of umbrella insurance.
JBTX
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Re: Sole Trustee and Trust Protection Aspect

Post by JBTX »

With our kids, neither of which will ever be able to responsibly manage sizeable sums of money, this time around in our updated estate plans we are going to go with a recommended local corporate trustee. While the approx 1.0% fee is not optimal, and they don't use just a pure index fund approach, the value I see in doing this, vs leaving it to a competent relative

1. It's just not fair to leave that burden to a relative, IMO.
2. In one case there could be govt benefits and special needs trust involved. Just one more burden not to give a relative
3. One spendthrift child could be difficult and constantly demand money. Not something I want to leave to a Relative.
4. There is a trust committee set up with a few trusted relatives that does have the power to change the corporate trustee if they deem necessary
5. There are some alternate corporate trustees also listed, just in case.
lazynovice
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Re: Sole Trustee and Trust Protection Aspect

Post by lazynovice »

JBTX wrote: Mon Jul 19, 2021 4:30 pm With our kids, neither of which will ever be able to responsibly manage sizeable sums of money, this time around in our updated estate plans we are going to go with a recommended local corporate trustee. While the approx 1.0% fee is not optimal, and they don't use just a pure index fund approach, the value I see in doing this, vs leaving it to a competent relative

1. It's just not fair to leave that burden to a relative, IMO.
2. In one case there could be govt benefits and special needs trust involved. Just one more burden not to give a relative
3. One spendthrift child could be difficult and constantly demand money. Not something I want to leave to a Relative.
4. There is a trust committee set up with a few trusted relatives that does have the power to change the corporate trustee if they deem necessary
5. There are some alternate corporate trustees also listed, just in case.
Did you consider Vanguard and rule them out for a reason? We chose Vanguard- although they will not take the house into the trust-because of the investing approach. But I am interested to hear whether others found reasons not to.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
JoinToday
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Re: Sole Trustee and Trust Protection Aspect

Post by JoinToday »

BillWalters wrote: Mon Jul 19, 2021 4:11 pm Based on personal experience, corporate co-trustee plus beneficiary power to remove and replace the corporate co-trustee is the way to go.

For a long time, I thought the trustee fees were just too high, especially when viewed on an opportunity cost basis. I no longer think this. How many people would you trust with $10 million?
I still struggle with the trustee fees. Especially since I know I can manage the investments in 15 or 20 minutes every 3 months to reinvest dividends. I have looked at Schwab and Vanguard. Both are around $40K per year on $10M (Schwab is a little cheaper, and will manage a house in a trust). And the difficulty of managing $100K vs $1M vs $10M is not significant.

Having said that, I am starting to move towards your position of hiring a corporate trustee (Schwab or Vanguard are leading contenders). The impact of poor management (by heirs) could be much greater than $40K per year.

I am also not keen on having others know the money my heirs have inherited. If one relative is struggling, I can see them being envious of someone inheriting $1M - $10M.
I wish I had learned about index funds 25 years ago
Gill
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Re: Sole Trustee and Trust Protection Aspect.

Post by Gill »

JoinToday wrote: Mon Jul 19, 2021 6:44 pm
BillWalters wrote: Mon Jul 19, 2021 4:11 pmEspecially since I know I can manage the investments in 15 or 20 minutes every 3 months to reinvest dividends. And the difficulty of managing $100K vs $1M vs $10M is not significant.
The big difference is the potential surcharge liability. Negligence in managing a $10 million trust can be expensive and corporate trustees have deep pockets.
Gill
Last edited by Gill on Mon Jul 19, 2021 7:17 pm, edited 1 time in total.
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Lee_WSP
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Re: Sole Trustee and Trust Protection Aspect

Post by Lee_WSP »

No one is watching over your relatives.

It is nearly impossible to hold a rogue trustee accountable.

Legal fees are paid out of the trust.

They can still charge a fee.

They can literally walk away with the entire trust.

They're unlikely to be very motivated in making sure the trust makes it to the next generation.

They are even more unlikely to be able to (or want to) deal with problem beneficiaries and their odd requests.

Corporate trustees just charge a fee.

You all know your relatives better than I do. Go into this decision with your eyes open.
Gill
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Re: Sole Trustee and Trust Protection Aspect

Post by Gill »

Lee_WSP wrote: Mon Jul 19, 2021 7:16 pm No one is watching over your relatives.

It is nearly impossible to hold a rogue trustee accountable.

Legal fees are paid out of the trust.

They can still charge a fee.

They can literally walk away with the entire trust.

They're unlikely to be very motivated in making sure the trust makes it to the next generation.

They are even more unlikely to be able to (or want to) deal with problem beneficiaries and their odd requests.

Corporate trustees just charge a fee.

You all know your relatives better than I do. Go into this decision with your eyes open.
Agree, Lee. As I posted earlier, I can’t imagine not having a corporate trustee for a trust of this size.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
JBTX
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Re: Sole Trustee and Trust Protection Aspect

Post by JBTX »

lazynovice wrote: Mon Jul 19, 2021 5:59 pm
JBTX wrote: Mon Jul 19, 2021 4:30 pm With our kids, neither of which will ever be able to responsibly manage sizeable sums of money, this time around in our updated estate plans we are going to go with a recommended local corporate trustee. While the approx 1.0% fee is not optimal, and they don't use just a pure index fund approach, the value I see in doing this, vs leaving it to a competent relative

1. It's just not fair to leave that burden to a relative, IMO.
2. In one case there could be govt benefits and special needs trust involved. Just one more burden not to give a relative
3. One spendthrift child could be difficult and constantly demand money. Not something I want to leave to a Relative.
4. There is a trust committee set up with a few trusted relatives that does have the power to change the corporate trustee if they deem necessary
5. There are some alternate corporate trustees also listed, just in case.
Did you consider Vanguard and rule them out for a reason? We chose Vanguard- although they will not take the house into the trust-because of the investing approach. But I am interested to hear whether others found reasons not to.
I did not look into them. I was looking for somebody more local, recommended and with specific experience with special needs situations. Given the constant parade of Vanguard service issues and their overall minimalist approach to most things I'm not sure that would be the best fit here.
eukonomos
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Re: Sole Trustee and Trust Protection Aspect

Post by eukonomos »

Gill wrote: Mon Jul 19, 2021 7:20 pm
Lee_WSP wrote: Mon Jul 19, 2021 7:16 pm No one is watching over your relatives.

It is nearly impossible to hold a rogue trustee accountable.

Legal fees are paid out of the trust.

They can still charge a fee.

They can literally walk away with the entire trust.

They're unlikely to be very motivated in making sure the trust makes it to the next generation.

They are even more unlikely to be able to (or want to) deal with problem beneficiaries and their odd requests.

Corporate trustees just charge a fee.

You all know your relatives better than I do. Go into this decision with your eyes open.
Agree, Lee. As I posted earlier, I can’t imagine not having a corporate trustee for a trust of this size.
Gill
Gill, is there a size where you could imagine it?
I am thinking of more modest estates of several million dollars, perhaps divided for multiple beneficiaries. Perhaps corporate trustees wouldn't even be interested?
Gill
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Re: Sole Trustee and Trust Protection Aspect

Post by Gill »

eukonomos wrote: Mon Jul 19, 2021 8:05 pm
Gill wrote: Mon Jul 19, 2021 7:20 pm
Lee_WSP wrote: Mon Jul 19, 2021 7:16 pm No one is watching over your relatives.

It is nearly impossible to hold a rogue trustee accountable.

Legal fees are paid out of the trust.

They can still charge a fee.

They can literally walk away with the entire trust.

They're unlikely to be very motivated in making sure the trust makes it to the next generation.

They are even more unlikely to be able to (or want to) deal with problem beneficiaries and their odd requests.

Corporate trustees just charge a fee.

You all know your relatives better than I do. Go into this decision with your eyes open.
Agree, Lee. As I posted earlier, I can’t imagine not having a corporate trustee for a trust of this size.
Gill
Gill, is there a size where you could imagine it?
I am thinking of more modest estates of several million dollars, perhaps divided for multiple beneficiaries. Perhaps corporate trustees wouldn't even be interested?
Size is not the only factor and there are many other considerations. Likely I’m a bit biased, having spent my career in the trust business, but the experience, impartiality and longevity of a corporate trustee can’t be duplicated by an individual.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
BillWalters
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Re: Sole Trustee and Trust Protection Aspect

Post by BillWalters »

Even if you have one or two people you absolutely know you can trust, do you have three? How about when all those people die? A prudently managed $10 million trust is likely to grow substantially over time. An individual trustee has horrible incentives and it is nearly impossible to hold them accountable or recover misappropriated funds. Worse, they can deplete the trust defending themselves.

Look, 1% or less is a small price to pay for peace of mind and creditor/spouse protection. Your odds of getting two generations of completely honest boglehead trustees are not good.
Lee_WSP
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Re: Sole Trustee and Trust Protection Aspect

Post by Lee_WSP »

eukonomos wrote: Mon Jul 19, 2021 8:05 pm
Gill wrote: Mon Jul 19, 2021 7:20 pm
Lee_WSP wrote: Mon Jul 19, 2021 7:16 pm No one is watching over your relatives.

It is nearly impossible to hold a rogue trustee accountable.

Legal fees are paid out of the trust.

They can still charge a fee.

They can literally walk away with the entire trust.

They're unlikely to be very motivated in making sure the trust makes it to the next generation.

They are even more unlikely to be able to (or want to) deal with problem beneficiaries and their odd requests.

Corporate trustees just charge a fee.

You all know your relatives better than I do. Go into this decision with your eyes open.
Agree, Lee. As I posted earlier, I can’t imagine not having a corporate trustee for a trust of this size.
Gill
Gill, is there a size where you could imagine it?
I am thinking of more modest estates of several million dollars, perhaps divided for multiple beneficiaries. Perhaps corporate trustees wouldn't even be interested?
At some point it becomes uneconomical if the trust goes on without a clear end date (child turns into an adult). I'd say fees above 2-4% per year are when you may want to give the beneficiary control and hope for the best. At under a million in assets, trustees start charging flat fees.
Topic Author
LSLover
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Re: Sole Trustee and Trust Protection Aspect

Post by LSLover »

bsteiner wrote: Mon Jul 19, 2021 2:41 pm
LSLover wrote: Mon Jul 19, 2021 2:34 pm ...
In order to mitigate the cost, can a typical boglehead-like successor co-trustee handle investment management on her own while limiting the role of the corporate co-trustee to trust administration only for about $5K (provided the corporate co-trustee agrees to that)?

Seems like the investment management part of the corporate trustee function is vastly more expensive than the administration function, at least when it comes to $10M trust. Fidelity, for instance quoted 0.45% fee ($45K per year) for full service, while only $4,500 for just the administrative function. So, by eliminating the investment management part, there could be some significant annual saving.

What are the most challenging parts of the investment management that would compel the trustor to engage the corporate trustee in BOTH investment management AND trust administration?
It need not be a successor trustee. It's hard to predict what will happen when an initial trustee ceases to act.

You could have an individual as an initial trustee together with a trust company that acts just as an administrative trustee. (Whoever handles the investments is a trustee even if you call him/her something else.)

However, that's not usually done for trusts for others. In those cases, people either name a bank or trust company as trustee or co-trustee, or they don't. When we have a trust company as an administrative trustee it's to obtain a particular result, usually someone in a high tax state creating a trust to avoid state income tax, or occasionally an asset protection trust where the trustee has to be in an asset protection jurisdiction.
Which states are considered the most friendly and tax-free for the irrevocable trusts?
JoinToday
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Re: Sole Trustee and Trust Protection Aspect

Post by JoinToday »

LSLover wrote: Tue Jul 20, 2021 10:00 am
bsteiner wrote: Mon Jul 19, 2021 2:41 pm
LSLover wrote: Mon Jul 19, 2021 2:34 pm ...
...
It need not be a successor trustee. It's hard to predict what will happen when an initial trustee ceases to act.

You could have an individual as an initial trustee together with a trust company that acts just as an administrative trustee. (Whoever handles the investments is a trustee even if you call him/her something else.)

However, that's not usually done for trusts for others. In those cases, people either name a bank or trust company as trustee or co-trustee, or they don't. When we have a trust company as an administrative trustee it's to obtain a particular result, usually someone in a high tax state creating a trust to avoid state income tax, or occasionally an asset protection trust where the trustee has to be in an asset protection jurisdiction.
Which states are considered the most friendly and tax-free for the irrevocable trusts?
1. States with NO state income tax are the ones to look at (from a state tax standpoint).
2. I believe state tax is usually (but not always) based on where the beneficiaries live and the income distributed to the beneficiaries (plus the source location of the income). But not in Kalifornia. If a trustee lives in California, California taxes income retained by the trust, regardless of the residence of the beneficiary or the grantor. So if a person lived and passed away in Nevada, beneficiary lives in Nevada, but trustee lives in California, income retained by the trust will be taxed by California. This would be a reason to move the trustee/trust administration to Nevada, etc.
3. Don't forget about Fed taxes. Income retained by the trust is taxed at the highest federal rates at relatively low income. 37% marginal tax rate for income above $12,950.
I wish I had learned about index funds 25 years ago
smackboy1
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Re: Sole Trustee and Trust Protection Aspect

Post by smackboy1 »

LSLover wrote: Tue Jul 20, 2021 10:00 am
bsteiner wrote: Mon Jul 19, 2021 2:41 pm
LSLover wrote: Mon Jul 19, 2021 2:34 pm ...
In order to mitigate the cost, can a typical boglehead-like successor co-trustee handle investment management on her own while limiting the role of the corporate co-trustee to trust administration only for about $5K (provided the corporate co-trustee agrees to that)?

Seems like the investment management part of the corporate trustee function is vastly more expensive than the administration function, at least when it comes to $10M trust. Fidelity, for instance quoted 0.45% fee ($45K per year) for full service, while only $4,500 for just the administrative function. So, by eliminating the investment management part, there could be some significant annual saving.

What are the most challenging parts of the investment management that would compel the trustor to engage the corporate trustee in BOTH investment management AND trust administration?
It need not be a successor trustee. It's hard to predict what will happen when an initial trustee ceases to act.

You could have an individual as an initial trustee together with a trust company that acts just as an administrative trustee. (Whoever handles the investments is a trustee even if you call him/her something else.)

However, that's not usually done for trusts for others. In those cases, people either name a bank or trust company as trustee or co-trustee, or they don't. When we have a trust company as an administrative trustee it's to obtain a particular result, usually someone in a high tax state creating a trust to avoid state income tax, or occasionally an asset protection trust where the trustee has to be in an asset protection jurisdiction.
Which states are considered the most friendly and tax-free for the irrevocable trusts?
I'm not BSteiner, but I did stay at a Holiday Inn Express last night...

What you want is a state that is: 1) tax friendly; 2) friendly statutes and case law; 3) experienced predictable judiciary. The granddaddy of all things corporate and trusts is of course DE. But nowadays there are many friendly jurisdictions vying for that business e.g. SD, NV, AK, etc.. Any good attorney in the trust and estate field should be familiar with at least DE law and probably some of the other jurisdictions as well - even if they are not a member of the bar there. Different states can be used for different purposes. Example: SD directed trustee, but some trust assets are held by DE serial LLCs.
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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LSLover
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Re: Sole Trustee and Trust Protection Aspect

Post by LSLover »

smackboy1 wrote: Wed Jul 21, 2021 10:41 am
LSLover wrote: Tue Jul 20, 2021 10:00 am
bsteiner wrote: Mon Jul 19, 2021 2:41 pm
LSLover wrote: Mon Jul 19, 2021 2:34 pm ...
In order to mitigate the cost, can a typical boglehead-like successor co-trustee handle investment management on her own while limiting the role of the corporate co-trustee to trust administration only for about $5K (provided the corporate co-trustee agrees to that)?

Seems like the investment management part of the corporate trustee function is vastly more expensive than the administration function, at least when it comes to $10M trust. Fidelity, for instance quoted 0.45% fee ($45K per year) for full service, while only $4,500 for just the administrative function. So, by eliminating the investment management part, there could be some significant annual saving.

What are the most challenging parts of the investment management that would compel the trustor to engage the corporate trustee in BOTH investment management AND trust administration?
It need not be a successor trustee. It's hard to predict what will happen when an initial trustee ceases to act.

You could have an individual as an initial trustee together with a trust company that acts just as an administrative trustee. (Whoever handles the investments is a trustee even if you call him/her something else.)

However, that's not usually done for trusts for others. In those cases, people either name a bank or trust company as trustee or co-trustee, or they don't. When we have a trust company as an administrative trustee it's to obtain a particular result, usually someone in a high tax state creating a trust to avoid state income tax, or occasionally an asset protection trust where the trustee has to be in an asset protection jurisdiction.
Which states are considered the most friendly and tax-free for the irrevocable trusts?
I'm not BSteiner, but I did stay at a Holiday Inn Express last night...

What you want is a state that is: 1) tax friendly; 2) friendly statutes and case law; 3) experienced predictable judiciary. The granddaddy of all things corporate and trusts is of course DE. But nowadays there are many friendly jurisdictions vying for that business e.g. SD, NV, AK, etc.. Any good attorney in the trust and estate field should be familiar with at least DE law and probably some of the other jurisdictions as well - even if they are not a member of the bar there. Different states can be used for different purposes. Example: SD directed trustee, but some trust assets are held by DE serial LLCs.
I inquired at Fidelity Investments (Trust Services) and their trust administration services’ situs is in New Hampshire. Anyone has any experience or comment with NH being a situs?
afan
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Re: Sole Trustee and Trust Protection Aspect.

Post by afan »

Gill wrote: Mon Jul 19, 2021 7:15 pm
JoinToday wrote: Mon Jul 19, 2021 6:44 pm
BillWalters wrote: Mon Jul 19, 2021 4:11 pmEspecially since I know I can manage the investments in 15 or 20 minutes every 3 months to reinvest dividends. And the difficulty of managing $100K vs $1M vs $10M is not significant.
The big difference is the potential surcharge liability. Negligence in managing a $10 million trust can be expensive and corporate trustees have deep pockets.
Gill
How much of those trustee fees go directly to pay insurance premiums for the bank or trust company? What proportion go to maintain the systems that make it nearly impossible for people at the corporate trustee to steal money from the trust?

Does the bank essentially do low risk administrative work for a low fee and charge what it costs, or a bit more, to accept the liability risk of being responsible for the assets?

As far as I have heard, Vanguard is the only corporate trustee that will offer to run a portfolio of a handful of index funds without trying to demonstrate its brilliance at active management. I would consider the active management to be of negative value. When I was shopping quite a few years ago, I could not find a bank that would agree to do passive management, even while charging active fees.

I have a beneficiary who is quite capable of managing the investments. Leaving the money to them outright would be fine as far as investment management goes. There are estate planning and asset protection advantages to leaving the money in trust, which are the reasons for avoiding outright bequests. My reasons for a corporate trustee are to avoid the risk of the busy beneficiary messing up the paperwork or having to spend too much time on it. That is why an administrative-only trustee seems appealing.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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FIREchief
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Re: Sole Trustee and Trust Protection Aspect

Post by FIREchief »

BillWalters wrote: Mon Jul 19, 2021 9:00 pm Look, 1% or less is a small price to pay for peace of mind and creditor/spouse protection. Your odds of getting two generations of completely honest boglehead trustees are not good.
Why do you need two generations?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
afan
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Re: Sole Trustee and Trust Protection Aspect

Post by afan »

FIREchief wrote: Thu Jul 22, 2021 1:21 pm
BillWalters wrote: Mon Jul 19, 2021 9:00 pm Look, 1% or less is a small price to pay for peace of mind and creditor/spouse protection. Your odds of getting two generations of completely honest boglehead trustees are not good.
Why do you need two generations?
If you want the trust to be there for grandchildren after your children have died.

Your kids serve as trustee for their trusts while they are alive and competent.

After that, you are either hoping your grandchildren are adult and appropriate to take over, or you need someone else to do it.

Should you have the trust pay 1% of assets for decades while your adult and competent offspring could do it themselves? Seems like a lot when the alternative might be to let your kids either turn the trustee job over to their kids to run, if they think they are up to the task, or hire a corporate trustee many years later, if not.

Sounds more appealing than giving up a large share of the assets to a corporate trustee when you don't need one.

As for whether one needs a corporate trustee based on the size of the trust remember this was money the grantors were managing themselves. Nowadays, helped a lot by a massive bull market. If in a handful of index funds, there would be nothing for the corporate trustee to do on the investment side except decide to dabble in active management.
Last edited by afan on Thu Jul 22, 2021 5:07 pm, edited 1 time in total.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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FIREchief
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Re: Sole Trustee and Trust Protection Aspect

Post by FIREchief »

afan wrote: Thu Jul 22, 2021 2:12 pm
FIREchief wrote: Thu Jul 22, 2021 1:21 pm
BillWalters wrote: Mon Jul 19, 2021 9:00 pm Look, 1% or less is a small price to pay for peace of mind and creditor/spouse protection. Your odds of getting two generations of completely honest boglehead trustees are not good.
Why do you need two generations?
If you want the trust to be there for grandchildren after your children have died.

Your kids serve as trustee for their trusts while they are alive and competent.

After that, you are either hoping your grandchildren are adult and appropriate to take over, or you need someone else to do it.

Should you have the trust pay 1% of assets for decades while your adult and competent offspring could do it themselves? Seems like a lot when the alternative might be to let your kids either turn the trustee job over to their kids to run, if they think they are up to the task, or hire a corporate trustee many years later, if not.

Sounds more appealing than giving up a large share of the assets to a corporate trustee when yo don't need one.

As for whether one needs a corporate trustee based on the size of the trust remember this was money the grantors were managing themselves. Nowadays, helped a lot by a massive bull market. If in a handful of index funds, there would be nothing for the corporate trustee to do on the investment side except decide to dabble in active management.
I think we're on the same page (again) afan. I was envisioning the responsible-adult child/trustee being granted a limited power of appointment so that he/she could decide how best to leave the assets to the next generation (likely in trust, but under whatever terms he/she felt were appropriate as the next generation develops) as the years go on. It might start with a testamentary appointment to a new trust with a corporate trustee. It might later be changed to a testamentary appointment to a new trust with a now-responsible older child serving as their own trustee. It might change as state laws change. They might exercise a power of appointment during their own lifetimes to appoint a limited portion of trust assets to a trust for the benefit of a lifetime spouse and some to the next generation. I will note that with the demise of lifetime stretch qualified trusts, I've been trying to better understand the flexibilities that can be added if a non-qualified trust inherits Roth assets and includes limited powers of appointment for the primary beneficiary. I'm not there yet, but perhaps these discussion will help me and others... 8-)

I'm certainly no fan of paying a corporate trustee 1% if I am highly confident in my primary beneficiary(s). (I am)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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