By Christopher M. Kavanaugh
Many planners are not familiar with the role that a bank or trust company might serve in the execution of a client’s estate plan. In some situations, naming a corporate fiduciary is a critical step in implementing the client’s intent and addressing potential roadblocks.
A significant aspect of estate planning entails addressing a wide array of “what if” scenarios. These include guardianship for minor children, end-of-life care, business continuity, tax code changes, predeceased heirs, remarriage of a surviving spouse, divorce of adult children or shielding assets from beneficiaries’ creditors. Another important issue to address is determining who will be tasked with effectuating the plan, and who will serve in that role if that person is not willing or not capable of doing so.
A client may be inclined to nominate a family member to serve as trustee or executor without determining whether that person has the requisite background or skill to serve in that capacity. Accountants, attorneys and advisors may be capable of fulfilling the responsibilities of a fiduciary. However, because estate planning spans generations, it is likely that these professionals may be retired or incapable of serving by the time their services are needed.
Whether selected to backstop an individual co-trustee or executor as a contingent fiduciary or named as the primary executor or trustee, there are significant reasons to consider that your client uses a corporate fiduciary.
In the administration of a trust or estate, a professional fiduciary must meet the requirements of local law. Certain assets must be custodized, appraised and insured. Investable assets must be managed with consideration to cash requirements and tax liabilities. State and federal tax returns must be prepared and filed. Distributions must be processed in accordance with the requirements established in the governing document.
Most individuals who are named to serve in a fiduciary capacity are unfamiliar with the responsibilities of the role. They must rely on the guidance of counsel at a potentially significant cost to the trust or estate.
A professional fiduciary is an expert in the management of trusts and estates. As such, the corporate fiduciary is equipped to address the complex issues that can arise in administration without incurring unnecessary costs.
Clients frequently are inclined to appoint a family member to serve as trustee or executor. A family member may not have the time or skill to perform the executor’s duties. Trusts also can present deep, ongoing issues regarding family conflict. When a trustee is given discretionary authority to make principal distributions to a beneficiary or a class of beneficiaries, the beneficiary is required to explain the nature of the request in detail. The trustee must determine whether the requested distribution meets the criteria established in the governing document. Fulfilling these requirements can fuel resentment between the trustee and the beneficiary. Rather than face these difficult emotional decisions, a family member trustee may simply opt to “rubber stamp” the beneficiary’s requests, which, in effect, contradicts the intent of the settlor or testator.
In contrast with having a family member as trustee, an independent corporate trustee is capable of making necessary decisions in an unbiased, consistent manner.
A corporate fiduciary is subject to significant internal and regulatory controls. Clients are aware of the significant and well-publicized cases of fraud and theft that have been perpetrated by trusted advisors. These controls and the backing of a financial institution provide clients with assurance that their assets are shielded from these risks.
Estate planning, particularly the creation of trusts, involves planning for generations. The most highly qualified and trustworthy individual is unlikely to serve in a fiduciary capacity for the entire term of a trust. Illness, career obligations and family emergencies can affect an individual’s ability to carry out their fiduciary responsibilities. As an individual fiduciary approaches retirement age, they must consider whether they wish to continue serving, while keeping current with changes in tax and local laws.
Because a corporate entity is perpetual, a corporate fiduciary is capable of serving as trustee for several generations.
As planners, it is appropriate to consider whether a corporate fiduciary is best suited to implement a client’s estate plans.
Christopher M. Kavanagh is director of trust services for Valley National Bank, Wayne, N.J. He is an attorney with more than 20 years of experience in the field of trust and estate administration. Christopher may be contacted at firstname.lastname@example.org.