Financial Advice for Retirement, Social Security, IRAs and Estate Planning

How the Turmoil Can Alter Trusts

Published on: Nov 01 2008
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The financial crisis is causing major changes in the banking business, and that will lead to changes at trust companies and in trustees. Trust creators and beneficiaries need to at least monitor the situation and might need to take action.

Many trusts have a corporate trustee or co-trustee, such as a bank or trust company. The corporate trustee provides custody of assets and continuity of management, plus accounting and tax reporting. It also might manage the investments, determine distributions, and perform other duties. In past visits we have discussed the various duties of a trustee, the advantages and disadvantages of a corporate trustee, and how the duties might be divided between a corporate trustee and others.

If a trust has a corporate trustee, regardless of the scope of the duties of that trustee the turmoil in the financial services industry might affect the trust. The corporate trustee might merge, be sold, enter bankruptcy reorganization, or go out of business. Any of those actions could affect the trust either immediately or over time.

Regardless of what happens to the trustee, settlors and beneficiaries of a trust need not panic. A trust is a separate legal entity. Its assets are not on the balance sheet of the trustee. The assets will be protected in a bankruptcy, bailout, merger, or other change involving the corporate trustee. The trustee manages and controls the assets but does not own them for purposes of the corporate balance sheet or ownership changes.

The trust principals need to be concerned about how corporate changes affect the operation of the trust. This is not a new concern or situation. Financial services companies have been consolidating for years, and we know the problems that can develop.

During a corporate transition, management and operation of the trust might be on the back burner as personnel changes are made. The needs of the beneficiaries might not receive as much attention or be handled as promptly as before the change. The situation should be monitored, and the trust creator or beneficiaries should be prepared to be assertive. They might need to locate the individual who is in charge of the trust and request that needed actions be taken, such as making distributions.

Even if the transition is smooth or has ended, those with interests in the trust still need to be alert.

In a merger or other corporate change, there can be snafus when the technology supporting the trustee is changed. Read statements from the trust carefully and consider asking for an interim statement. Compare with prior statements to be sure all the holdings made it through the transfer and the correct fees are being charged.

After the transition the individual in charge of the trust might be new and unfamiliar with the trust, its creator’s intent, or the needs and interests of the beneficiaries. The trustee also might be located further away and be in charge of far more trusts than before the corporate change. In these situations, even a well-intentioned trustee will find it difficult to be as responsible, attentive, and familiar with the situation as the trustee before the merger.

Reaching out to the trustee to bring him or her up to speed on the history and the settlor’s intentions might be enough to remedy the situation.

If service still is not as expected, consider changing trustees.

Many trusts have a provision that allows an independent corporate trustee to be substituted with another independent corporate trustee. The exact terms and requirements of a change are in the trust agreement. Approval of all beneficiaries might be required. Or there might be co-trustees or an independent person or committee that makes the decision. Often a change can be made no more than once every five years. If there is no change provision in the trust, the only option might be to ask a court to change the trustee. Be aware the trustee can use trust assets to defend itself.

Often the threat of changing trustees is sufficient to improve performance. If not, the beneficiaries and others involved in the trust should begin the process of changing trustees.

Another major issue to watch in this turmoil is the investment portfolio of the trust. A new trustee might mean different investments or a different strategy. One trust company’s conservative income strategy might be different from another’s. The new trustee might be more or less aggressive than the original trustee, or might put more or less emphasis on current income. You want to be sure that the trustee is aligned with the goals and risk tolerance of the people involved with the trust.

Finally, consider where the assets of the trust are held and the broker the trustee uses. If the trust company does not have its own brokerage company, the assets will be held or traded through a broker. While the assets should be safe if something happens to the broker, there could be a delay in the ability to execute transactions or having access to the money. Beneficiaries or co-trustees should review the choice of brokers with the trustee. The trustee might be required to use a particular broker because of corporate relationships. In that case the only way to change the broker is to change the trustee.

In the current environment, those involved with a trust should not be passive. They should be aware of all changes concerning the trust and monitor developments. Action should be taken before there is a major problem.

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