Corporate trustee vs Individual trustee – 10 Things to Consider
Part 1
Corporate trustee vs Individual trustee
It is a common belief that a relative, close friend, or lawyer, is the best person to be the trustee for a family trust. However, there are lots of reasons why this simply may not be true. A professional fiduciary or corporate trustee, like a trust company, in our view, is the better choice in a number of circumstances.
The job of a trustee is extremely time consuming, highly skilled, and potentially libelous. It is essentially a lifetime job commitment, spanning many years, or even decades and the trustee is responsible for managing the assets, protecting them, and distributing them to the beneficiaries as required under the trust deed, in most cases, for many generations.
Trustees should be prepared to act in the best interest of the beneficiaries at all times. In some instances, this requires making tough and unpopular decisions. Therefore, trustees must be extremely organised recordkeepers and have significant knowledge about financial and legal affairs. The trustee will need to be able to work with and manage various professionals, such as lawyers, accountants, investment managers and other advisers.
We would like to dispel some of the common myths that are held about hiring individual trustees as opposed to institutional trustees, to do the work.
1. Costs
People often believe that individual trustees are less expensive than institutional ones. This is not necessarily the case. Individual trustees should hire other professionals, such as lawyers, accountants, custodians and investment managers to help them perform their trust-related duties. When the costs of these individual services are added on to the trustee fees that an individual trustee (e.g. a lawyer) may charge, you end up paying more than you would pay with a corporate trustee who provides some capabilities in house and can help coordinate and manage matters. Often institutional trustees will bundle all fees into one comprehensive fee.
Depending on the tax residence of the settlors and beneficiaries, as well as the location of the assets, an offshore corporate trustee may be a favourable choice for such individuals. Some offshore jurisdictions provide sophisticated trusts laws, along with strong asset protection rules and regulations and can make having an offshore trust very cost effective.
2. Ability to Make Difficult Decisions
Sometimes trustees have to make difficult decisions, such as withholding funds from a spendthrift beneficiary or helping a beneficiary with life problems such as alcohol or substance addiction. Individual trustees, who are often times family members or friends, may be too emotionally invested in the situation, in order to assist effectively and objectively. Also, they may not have the tools or resources to make sound impartial decisions. For example, some individuals may not have the ability to say “no” when necessary and, if they do refuse a particular request, the relationship between the beneficiary and the individual trustee, may deteriorate.
A corporate trustee is trained to be impartial in making such decisions related to the beneficiaries and will administer the trust in accordance with its terms and applicable laws. Experienced trust officers make major decisions about discretionary distributions based on their professional understanding of trust provisions, beneficiary circumstances and intentions. Institutional trustees often times have the resources to form distribution committees and ensure that distributions decisions are fair and unbiased.
3. Recordkeeping and Reporting
Proper trust administration may involve filing tax returns, issuing statements and keeping records of trust accounts and activities. For example, tax authorities or in some instances, trust protectors, may request information on the financial affairs of the trust, which the trustee is responsible for providing. Trustees must keep accounts and report on any income gains, distributions, capital gains and losses, including accumulated income, that impact the trust and future distributions to beneficiaries. Where there are a number of beneficiaries that reside in various tax jurisdictions, the trustee must keep track of various tax schedules and reporting deadlines.
Family members or other individuals may find this responsibility too overwhelming and time consuming, which could lead to errors and/or omissions resulting in heavy penalties on the trustees of the trust.
4. Safeguarding Assets
Asset protection is an irreducible core responsibility of a trustee. Trusts managed by corporate trustees are supervised and reviewed by internal and external auditors from regulatory authorities and audit firms. No such safeguards exist with respect to individual trustees, as they are not held to such a professional standard.
Trusts administered by individual trustees are rarely subject to regulatory scrutiny, which may leave potential mismanagement of the trust or misappropriation of trust assets undetected.
In addition to this duty to protect and preserve trust assets, it is important to note all trustee’s duties. A list of these trustee duties and brief description are provided below.
5. Acceptance of Liability
Often time individual trustees are not aware of the personal liability that comes with holding the office of trustee. Individuals are often discouraged to continue a trusteeship, if and when this sobering thought becomes apparent. Even if the individual trusteeship was accepted in good faith, unintentional misconduct that falls short of legal standards could result in personal loss to the individual trustee. Examples of common mistakes include improper accounting, mishandling of assets, conflicts of interest, poor investment decisions and failing to achieve the most advantageous tax savings which could cause disgruntle beneficiaries to seek legal action against the individual trustee. Most individual trustees are not able to manage such situations.
A corporate trustee is generally equipped to avoid such liability and usually has professional indemnity insurance as further protection. In addition, corporate trustees tend to have trained accounting staff and bookkeeping systems to ensure meticulous accounting of receipts and disbursements and to provide accurate reporting to beneficiaries, protectors, internal and external auditors, and regulatory authorities.
6. Service Consistency
Most corporate trustees have service level contracts that they are obligated to honour. A break in service, is not likely with corporate trustees because there is always someone assigned to devote full time and attention to administering the trust.
Unlike an individual trustee who may go on vacation, predecease you or otherwise be unable to administer the trust with no contracted time or service level constraints. It may be difficult for individual trustees to respond to requests if he or she is on vacation or otherwise preoccupied. Service consistency becomes an even greater issue if an individual trustee becomes ill, incapacitated, or worse yet, dies. Replacing the trustee in these cases could be complicated because concern about the illness and its effects, proving your trustee is no longer fit for the job or dealing with the loss of the family member or friend in some cases, could be a difficult and painful task for the family, as well as for the trustee and his or her family; rather than the issue at hand, which is to find a replacement trustee.
7. Location
In general, corporate trustees are located in the jurisdiction of the governing law of the trust deed and are familiar with the laws and regulations of that country which applies to the trust. This allows for smooth administration and corporate governance of the trust based on corporate and regulatory requirements, which are jurisdiction specific. Laws and regulations are constantly changing and therefore institutional trustees constantly change policies and procedures to keep up with the ever-changing rules.
Most individual trustees are not familiar with the unique laws and regulations that govern the trust and may easily change place of residence, making it difficult to stay current with local laws and regulations of the trust.
8. Restrictive Covenants
Some trusts may state that a trustee must have a certain level of capital under management or located in a certain jurisdiction in order to be trustee of the trust. Often times educational requirements of the trust administrator are stipulated. Corporate trustees are normally able to meet restrictive covenant requirements due to sheer number of individuals to choose from and having ‘deeper pockets”.
Individuals may not be able to meet the restrictive covenant requirement(s) that will allow them to be trustees of the trust. Therefore, such individuals will be precluded from being trustees of the trust. Although this may be a devastating blow to a family member or friend who was looking forward to assuming the trustee role, the restrictions may be crafted by a settlor to prevent individuals from being trustees of the trust.
9. Additional Services
A lot of corporate trustee’s parent company may be a bank or law firm. This allows the corporate trustee to tap into wider resources. For example, loans to beneficiaries may be easily facilitated where the parent company is a bank or demand trustee advice where the parent company is a law firm.
Individual trustees are usually on their own, with very little resources at their disposal.
10. Personality
Personality fit is a major component to choosing a trustee that will best suite your needs. Corporate trustees have many trust officers to choose from and within reason, caseloads can easily be moved from one trust officer to the next depending on the client’s personal preference.
You are stuck with the person that you choose to be your individual trustee for the duration of the trust period, which can be an exceptionally long time. In fact, most individual trustees cannot survive the lifespan of the trust, which is why a corporate trustee, who will have built in succession plans, is the better choice.
Conclusion
When choosing between a corporate trustee and an individual trustee, one must weigh all the options prudently. Cogitate each pro and con, benefit, and drawback. Careful consideration must be given to the best trustee for the job at hand given the types of assets administered, settlor and beneficiary dynamics, longevity of the trust and the requirements of the trust instrument, in order to make the decision that is best for you.
Part 2
Trustees Duties
We considered 10 things to consider when deciding whether to appoint a corporate trustee or individual trustee. As mentioned, there are a wide range of matters for pending trustees to consider and consider when faced with this decision.
At its simplest, the trustees hold the trust assets for the beneficiaries and as such they must keep it safe. Having been in existence in England since the Crusades, the rules surrounding trusts that have developed in England & Wales, and other jurisdictions, have evolved to form a sophisticated and complex set of duties that trustees need to follow.
In deciding who you want to appoint as a trustee and whether you should take on the trustee role, it is worth considering the trustee’s duties. The potential trustee should have the time as well as the expertise to deal with the various matters or know to whom they can and should delegate such tasks. In discharging their duties, it is important that all the matters are documented correctly. This is increasing important as litigation against trustees is becoming more prevalent.
Before accepting the role as trustee, it is vitally important that the prospective trustee understands the extent of their duties. Only if they are happy that they can discharge these duties, should they accept appointment to the office of trustee. Below is a brief summary of some of the more important duties.
1. To act with loyalty, honestly, integrity, good faith and transparency
Trustees must not allow personal interests to conflict with their duties as trustees. A consequence of this is that they must not benefit from their position. They must not make secret profits and they should not normally purchase trust property.
2. To comply with the terms of the trust
A trustee must ensure they know and understand the terms of the trust and comply with the express duties and directions contained in the trust deed.
3. To take control of, give safe custody, manage and preserve trust property
It is important that trustees understand the extent of the trust property and ensure that it is transferred into their name. They also need to ensure that the trust property is safe and preserved. This includes pursuing any debts owing to the trust.
4. To act impartially between beneficiaries
There is a general duty to act in the best interests of all the beneficiaries. Trustees must not allow one beneficiary to suffer at the expense of a benefit to another.
This is an area where it can be difficult when dealing with a number of beneficiaries with different personal and financial circumstances. These difficulties can be exacerbated by personal tensions between beneficiaries. It is important for the trustees to be impartial and document their decision to help guard against claims from disgruntled beneficiaries. It is not unusual to see unhappy beneficiaries (whether justifiable or not) attacking the trustees for alleged breach of their duties.
5. Duty to keep accounts and provide information
Trustees have a duty to keep and provide clear and accurate accounts.
In general, trustees have a duty to provide information to the beneficiaries regarding the trust. This includes producing accounts, trust deeds and legal advice. It is not just a case of disclosing all trust documents and information. The trustees’ decision-making process does not (and often should not) be disclosed; disclosing this could open the trustees to unwanted scrutiny and legal attach potentially. There is often a difficult line to discern ‘trust documents’ that should be disclosed and other information about the trustees’ exercise of their discretion that does not have to be provided to the beneficiaries. It takes skilled trustees to know where there is an issue and when to seek legal advice on where the line lies.
6. Duty to act personally
By default, the position of the trustee is a personal one and the duties cannot normally be delegated.
However, some functions can be delegated where they are authorised by the trust instrument, the beneficiaries or it is permitted by statute. This means that it is important for trustees to understand the trust deed and the law of the relevant jurisdiction to know what they must do personally and what they can delegate.
For example, the investment of a portfolio of stocks and shares can be delegated to an investment manager. Depending on the trust deed and jurisdiction there are likely to be specific rules about what the trustee has to do, such as ensure the agreement is in writing and review the arrangements every year.
7. To take reasonable care
There is a duty to take reasonable care and skill in each and every exercise of the trustee’s duties and powers by trustees. This is set out in case law and many jurisdictions also have specific legislation as well.
Trustees need to understand both the common law and statutory aspects. Where they fall short, beneficiaries can make a claim against the trustees for not managing the trust assets properly.
Conclusion
This highlights some of the duties and responsibilities of a trustee. As you can see trustees need to think carefully about every aspect of their conduct. Even where trustees can delegate some duties, trustees need to have a general oversight. Where trustees have not fulfilled their duties, they can have personal liability to make good any losses to trust assets. The office of trustee has significant duties and consequences, and it is important that any prospective trustee understands the full implications and has the support from other professionals such as lawyers and accountants to ensure they discharge their duties correctly.
