WEALTH WISE

When to Choose a Corporate Fiduciary

A corporate fiduciary is often more effective than a family member serving as fiduciary, especially for trusts and estates with complex family and asset issues. Many assume that a family member is the best choice to serve as trustee and executor of their estate. In addition to perceiving this option as less costly, they believe that a family member is in the best position to understand the family's unique needs. This article explores five of the most important elements in deciding between a family member and corporate fiduciary.

The Role of the Fiduciary

Although the terms trustee and executor are used interchangeably as "fiduciary" in this article, each role carries unique responsibilities. A trustee has legal title to assets placed in trust and is obligated to serve the best interests of the trust's beneficiaries. An executor must inventory the estate, pay all taxes and debts, and distribute assets according to the terms of the decedent's will.

Given the breadth of a fiduciary's duties and the potential exposure to personal liability associated with those duties, one should consider several factors in selecting a trustee and/or executor.

Technical Expertise -- The fiduciary must develop the trust's asset allocation so that there is sufficient income for current interests and principal growth for future interests. With the advent of the Prudent Investor Acts and Principal & Income Acts, there have arguably been more far-reaching changes to trust investing and administration in the past few years than in the preceding 200. A family member lacking investment expertise in these areas who does not delegate investment responsibility risks personal liability.

Similarly, administering a trust or estate is an exacting, complex, and time-consuming job requiring expertise in tax issues, asset valuation, trust accounting, and cash management, business succession, and many related issues.

Impartiality -- A fiduciary may face numerous conflicts of interest in the administration of a trust or estate, often placing a family member between the proverbial "rock and a hard place."

By contrast, a corporate fiduciary should be an impartial third party, able to carry out the wishes of the grantor or decedent of the estate without familial pressures. In this regard, the fiduciary's independence is central to its role.

Permanence -- Most trusts last for generations and so-called "dynasty trusts" can theoretically last forever. A corporate fiduciary can provide continuity of administration that a family member cannot. Although the personnel involved in the trust's administration may change, the underlying corporate entity continues.

Accountability -- Any interested party to a trust or estate can sue the fiduciary for its actions or inactions. Many individuals faced with potential litigation choose not to accept appointment as a fiduciary. A corporate fiduciary generally carries insurance as a cost of doing business and otherwise has the financial resources to make a claimant whole.

Cost -- Depending on the complexity of the assets and administration, naming a corporate fiduciary may be more efficient and less costly in the long run. For instance, if a family fiduciary has no expertise in investments, real estate, tax accounting, or other critical aspects of the fiduciary's role, he or she will need to hire experts for those tasks and coordinate their efforts. A corporate fiduciary already possesses most or all of this organizational structure. It will typically staff tax and investment experts, along with experienced personnel in trust administration and estate settlement. In addition, corporate fiduciaries often have strategic partnerships with specialists in real estate and closely held business interests. Since a corporate fiduciary is responsible for all of these duties, coordination is built in.

The Best of Both Worlds

In many cases, a combination of family members and corporate fiduciaries offers the best solution. Most corporate fiduciaries welcome the opportunity to have a family trustee with intimate background on family issues. The co-trustees may share the duties nearly equally, or the trust may be drafted to capitalize on the skills of each trustee.