Choosing a Trustee: Pro vs. Average Joe?

From the perspective of a trust officer, the benefits of a professional trustee are endless and obvious. Professional asset management, trust administration, and tax planning are the most commonly cited, but they don’t even scratch the surface in terms of the full job description. With such a wide array of services provided, we at Garden State Trust Company tend to hear only two recurring reasons against working with a professional trustee:

  • Fees for their services
  • Lack of familiarity between the family and the corporate trustee

Fees

Often times the first question asked by potential new clients is simple: “What are your fees?” An understandable question, as professional trustees do not work for free. Similar to an accountant, investment manager, or attorney, there is a cost in obtaining professional trustee services. However, as Einstein might say, “It’s all relative!” See below a more productive question that considers the alternative options.

Q: I’m fee conscious. How do the trustee costs compare between your company and my Uncle Joe?

A: Great question! First and foremost, Uncle Joe should be entitled to compensation for his services as a fiduciary, in addition to reimbursement for expenses incurred related to his duty as trustee. Is Uncle Joe an experienced investment manager? If not, he may be best suited to hire a professional investment manager (0.75%-1.5% annually). How about taxes? Has Uncle Joe been exposed to proper fiduciary accounting rules and regulations? Hiring an accountant is most certainly prudent (many accountants charge $500-$1,000 to file the annual 1041 fiduciary income tax return, in addition to their hourly rate for providing trust accounting services). What happens when Uncle Joe needs guidance as to the administration of trust? It would be wise for him to seek legal advice from a trust and estates attorney ($300-$500/hr rates)

Let’s do a cost comparison.  Keep in mind that individual trustees in New Jersey are generally entitled to a statutory fee/commission schedule for their services as trustee equal to 0.5% on the first $400,000 of assets, and 0.3% on amounts over $400,000. In addition, Uncle Joe would be entitled to 6% of any income generated from the trust assets. Conversely, professional trustees are instead (generally) entitled to their published schedule of fees.

$1M Trust Example Chart

As you can see in this example, even the most conservative estimated costs of hiring investment management services produce a higher total annual cost to the trust than the total fees of a professional trustee. Also, it should be noted GSTC’s cost for filing the annual 1041 tax return is significantly lower than the average cost for an individual seeking accounting services. Additionally, an individual, less-experienced individual trustee may need to seek legal guidance more frequently than a professional trustee when it comes to properly administering the trust document.

Family Familiarity

Q: I want an experienced trustee, but I also want someone who is close to my family. What do you suggest?

A: A common knock on professional trustees is their unfamiliarity of the specific dynamics of a particular family. A fair point during the first meeting, but this argument fizzles over time as the relationship develops. In these types of situations, we may recommend a co-trustee arrangement between a family member trustee and the professional trustee. The family member trustee is able to be the eyes and ears on the ground, and relay the news and needs of the beneficiary to the professional trustee on a regular basis. Meanwhile, the family benefits from having an objective, professional trustee available to handle the investment management, accounting, and daily administrative duties that otherwise might be burdensome or impractical for the family member trustee. Most importantly, should the individual trustee become incapacitated or pass away, the professional trustee is readily available to continue the administration of the trust for the family without interruption.

Serving as a trustee is an ongoing commitment and, for many individuals, an unfamiliar job in which they have had little to no experience. Aside from the fiduciary obligations, family dynamics can put individual trustees in difficult situations. The trustee may have a close relationship with a beneficiary who is making incessant requests for distributions that the trust creator would have never approved. This can potentially cause uncomfortable situations between trustee and beneficiary that both parties would prefer to avoid. A co-trustee arrangement with a professional trustee can help alleviate these types of issues. Let the professional trustee be the “bad guy” who is saying no to the constant requests for a Porsche from an 18-year-old trust beneficiary.

Q: What services do professional trustees provide?

A: A professional trustee takes on an extraordinary role. Held to a higher fiduciary standard than an individual trustee (family member, friend, e.g.), a corporate trustee holds a duty of care and loyalty to the beneficiaries. In addition to the duty to manage the assets, coordinate the tax preparation and filing, and administer the trust document properly, trustees are of service to the beneficiaries. Whether they’re planning and paying for higher education, coordinating the sale and purchase of a new residence, or simply arranging for the payment and installation of a new kitchen appliance, the roles of a trustee are endlessly defined. For many beneficiaries, their trusts are their main financial source and, as a result, trustees take on an enormous responsibility.

Garden State Trust Company possesses capabilities and expertise in the investment management, financial planning, and fiduciary administration areas. When one considers that all of these services are included in our annual fee, it pales in comparison to the cumulative, a la carte professional expenses hired by an individual, inexperienced trustee. Additionally, consider the fact that the trust responsibilities and liabilities fall on the shoulders of the trustee. Not only does the individual trustee need to take the time to seek out competent professionals to perform the necessary work, but they need to ensure the work is done correctly and in a timely fashion. This can involve many phone calls, emails, and meetings on an ongoing basis. Often times, individual trustees can only contribute part-time attention to their role as trustee. After all, they have jobs, children, parents, and all of life’s obligations to worry about each and every day.

Professional trustee fees can actually be a bargain when you compare them to the alternative expenses required by an inexperienced individual trustee. Individuals can benefit from partnering with experienced, professionals who efficiently and accurately perform all of the services required as a trustee. This partnership allows the family to preserve and grow their personal relationships while the professionals preserve and grow their wealth.