Whom Should You Trust to Run Your Trust?

A two-trust estate plan is increasingly popular with many couples. Known as an A/B plan, it consists of a marital (A) trust and a bypass (B) trust. Each spouse creates a bypass to hold assets that can be passed free of estate taxes ($2,000,000 in 2006), and keeps these assets out of the estate of the first spouse to die.

The bulk of the remaining assets usually goes to a marital trust for the benefit of the surviving spouse. In most cases, the spouse has a general power of appointment and can name the beneficiaries. (If the trust limits the surviving spouse’s ability to name beneficiaries, it becomes a Qualified Terminable Interest Property trust-QTIP for short.)

Whom Should You Pick?

Naming your spouse as co-trustee with a professional is a good choice and a common one. Alternatively, you can appoint a professional trustee to serve alone, as successor trustee or as the trustee of last resort if the trustee you named initially isn’t willing or able to serve. Your choices include bank trust departments, law firms, independent trust companies or individuals who work as professional fiduciaries.

Another possibility is to name your spouse as trustee for the marital trust-assets wind up in his or her estate anyway-and a professional trustee for the bypass trust. The risk with that approach is that you may end up with an uncoordinated investment plan.

Think twice if there’s a chance your spouse, as trustee, may need to hire advisers such as a money manager, accountant and lawyer to help manage the trust. Those fees, plus the cost of a professional trustee for the bypass trust, could wind up being expensive. It might be cheaper to have an institution handle both.

Institutions charge for assets under management, and the A/B trusts would count as one for fee purposes. Trusts of $200,000 to $900,000 typically pay 1% to 1.5% of the corpus annually. Those passing the $1-million mark often dip below 1%. Trusts under $200,000 tend to cost more.

As mentioned, a marital trust is taxed in the surviving spouse’s estate; the bypass trust is not. In addition, only a spouse can be the income beneficiary of a marital trust. Consequently, many couples would benefit by having the marital trust hold income-producing assets and use the bypass trust for appreciating assets such as stocks.

Reasons to consider professional trust management for one or both trusts include the following:

1.

Expertise. Managing investments, taxes, tax filing and distributions is complicated.

2.

Continuity. This is especially important for the bypass trust and when you are transferring wealth to more than one generation.

3.

Neutrality. A neutral party may be just the buffer a family needs. A professional trustee can also tell it like it is-something your spouse or family members may find difficult to do.

4.

Build in Flexibility. No matter whom you name as trustee, arrange for the trustee’s removal and succession by including appropriate language in the trust documents. You may also want to consider setting investment standards and benchmarks for the professional trustee. Beneficiaries often are given the right to replace the trustee-subject to written guidelines in the trust. But you could give replacement rights to an independent trust adviser or a trust protector if that would be more appropriate.

5.

Interview the Prospects. Before interviewing prospective candidates, draw up a list of needs and expectations. Then ask the following questions:

How long has the firm or individual been in business as a trustee? (If you are hiring an individual to act as fiduciary, check on years of experience, evidence of errors-and-omissions insurance and good references from lawyers.)

What is the fee schedule? What is the minimum fee or account size? Is there a different fee scale for managing a portfolio of mutual funds and individual securities?

Will a termination fee be assessed if the account is closed and transferred to another trustee?

What other charges could be incurred such as extra fees when your spouse may need a lot of attention from trust officers or others?

What is the firm’s investment philosophy or style? The total amount of assets under management? How has it performed?

How much experience and education does the trust officer have? How accessible will he or she be to trust beneficiaries?