By: David M. Frees III Pennsylvania Trust and Estate Lawyer
Is A Bank Ever The Best Trustee?
There are many reasons to set up a trust (either during life or under your will). Some people set up a trust to protect a young child from having access to money at a young age. Others use a trust to protect and to provide for a child with special needs.
Many trusts are established to provide income and assets to a surviving spouse and then to pass on the assets to family members such as children and grandchildren.
Some of our clients set up GRATs and or nursing home trusts to move assets to the next generation, or to protect them from being lost to a nursing home.
And, with each situation where a trust is the best solution another equally important question arises: Who should be the trustee of this trust?
There are many possible trustees to choose from. For example, you can select the following a trusts of your Pennsylvania trust:
a family member
a professional adviser
a bank or trust company
However, depending on the purpose of the trust, you may need to limit cases where you name yourself or family members as trustees since a trust is often taxable or reachable by creditors in a lawsuit, when a family member, spouse, or parent is the trustee. In fact, there is a specific section of the IRC (Internal Revenue Code) (Section 672) that will cause such trusts to be included in a beneficiary’s estate and then taxed.
So, it may be that you want to avoid family members or at least make them a co-trustee. Also, family members are often unaware of all of the new rules which apply to trusts under the UTA (Uniform Trust Act) and the Prudent Investor Rule. Family members also often fail to file income tax returns for the trust or to keep the trust records properly. Accordingly, family members might actually end up exposed to liabilities and law suits that they never anticipated.
But, if you want to avoid using a family member as trustee, what are the alternatives?
Friends, Advisers, and Banks.
And, while many families have family members and friends that will undertake the risks of being a trustee, and who will seek the right advice to make sure that they follow the new legal compliance requirements of trustees, it may be that a bank or trust company offers a viable alternative and may be the best choice.
Banks are well insured, are highly regulated, have procedures and specific policies, and they regularly file the returns and keep the records accurately.
I know that almost everyone has heard about a beneficiary that did not like their bank trustee, but banks can be the best choice and that can be especially true when a family member or friend is appointed as a co trustee or a trust protector and can fire and hire bank trustees to ensure that the bank is charging appropriate fees, getting good investment returns and is looking out after the beneficiary.
Of course, there are advantages and disadvantages to each approach. But make sure that you discuss trustee selection with your lawyer and accountant because the wrong choice of trustee can mean that the trust will not work to accomplish your tax and planning goals.
P.S. If you would like to create a trust now or under your will, please call