Are you a Family Trustee?

Replacing a corporate trustee seems daunting. This case study shows how to get started, compare costs, and identify barriers to switching.

Before starting Second Opinion Wealth Management, I helped a family evaluate their relationship with the trust department of a large money center bank. It made all fiduciary and investment decisions. But its portfolios had underperformed market benchmarks by wide margins.

The bank’s service also troubled the beneficiaries, who maintained three separate accounts that totaled approximately $1.5 million. It was a small number by the bank’s standards, which meant that they usually dialed a call center to request disbursements rather than a single team dedicated to their account. This issue was particularly vexing on several occasions because the bank had made several mistakes entering information into its database.

Get Started

What authority does the trust grant you?

Given the growing dissatisfaction, a family member – who served as a co-trustee of the trust – decided to explore the options on behalf of the beneficiaries.

Her first step was to understand what powers the trust conveyed in her. And in this regard, the document was clear: “Following the death of the Grantor, the corporate Trustee hereunder may be changed at any time and a successor corporate Trustee appointed by the individual Trustee.”

Are there any specific requirements for a successor trustee?

The trust agreement stated that the successor corporate Trustee must be a “bank or trust company.” This broad definition gave the individual co-trustee great flexibility, and I counseled her to separate fiduciary functions from investment management.

Whom do you notify?

Together, we identified a successor corporate trustee. It was a bank that provided fiduciary and administrative services – without call centers. Although the bank retained veto power over outside money managers, it quickly approved the one we proposed.

While the trust document did not require the co-trustee to notify other beneficiaries, the successor trust company did. And while you might have the power to make changes, it is always important to consider how beneficiaries will respond to the change.

Compare Costs

The co-trustee and I compared the historic investment results of the existing corporate trustee to our proposed successor. But past results do not guarantee future performance. So, we focused primarily on cost differences to compare the two approaches, which the following table illustrates.

1. Actual
2. Quoted
3. Annualized % fees for the month ending 12/31/2016
4. Weighted Average Expense Ratio based on Ending Asset Allocation
5. Weighted Average Expense Ratio based on Replacement Asset Allocation

The co-trustee realized she could cut the trust’s annual fees by 32% annually. (Calculated as follows: $6,818/$21,347 = 32%.) But she worried about the tax consequences from changing trustees. There were roughly $285,000 in unrealized capital gains, and the new money manager planned to liquidate all securities. She also knew that the existing trustee would charge termination fees and wondered whether changing trustees would yield a better outcome for her family.

Identify Barriers to Switching

Several variables would determine the success (or failure) from switching corporate trustees: investment performance, quality of fiduciary decisions, and clarity of reporting among others. There was no way to be certain about the outcome in advance. But it was relatively simple to identify the immediate out-of-pocket expenses.

Total Costs Incurred Now were 3.86% of total assets. This number seemed modest number relative to the S&P 500’s annualized returns of 9.65% from 1928 through 2017. But annual compounding is a powerful force. We wondered what the trust could earn on $58,500 if not forced to incur the costs.

The short answer was, “Who knows?”

It was impossible to predict market returns. Similarly, it was impossible to predict when the existing trustee would realize the $285,000 in capital gains — if ever. But we had framed the decision. That is, was it better to 1) incur costs of $58,500 now in exchange for annual savings of roughly $6,818 in fees and operating expenses or 2) hope for better service and performance from the existing trustee in the future?

What Would You Do?

Sometimes, there are no right or wrong answers, just decisions to make in the absence of perfect information. I recommended the family change corporate trustees for three reasons:

• Estimated savings of $6,818 per year
• Miscellaneous service considerations
• Separation of fiduciary from investment functions because I have never known a financial institution to fire itself for underperformance.

While the family trustee was deciding what to do, there was one final wrinkle. The existing corporate trustee notified the family that it was raising fees .10% in line with its firm-wide schedule. This increase would, in effect, increase the annual savings from $6,818 to $8,333 under the proposed arrangement. No phone call. The co-trustee received a form letter, which in the end made her decision really easy.

If you are considering a change in trustees and would like a second opinion, send us an email. We’d like to hear from you.

Are you a Family Trustee?

Replacing a corporate trustee seems daunting. This case study shows how to get started, compare costs, and identify barriers to switching.

Before starting Second Opinion Wealth Management, I helped a family evaluate their relationship with the trust department of a large money center bank. It made all fiduciary and investment decisions. But its portfolios had underperformed market benchmarks by wide margins.

The bank’s service also troubled the beneficiaries, who maintained three separate accounts that totaled approximately $1.5 million. It was a small number by the bank’s standards, which meant that they usually dialed a call center to request disbursements rather than a single team dedicated to their account. This issue was particularly vexing on several occasions because the bank had made several mistakes entering information into its database.

Get Started

What authority does the trust grant you?

Given the growing dissatisfaction, a family member – who served as a co-trustee of the trust – decided to explore the options on behalf of the beneficiaries.

Her first step was to understand what powers the trust conveyed in her. And in this regard, the document was clear: “Following the death of the Grantor, the corporate Trustee hereunder may be changed at any time and a successor corporate Trustee appointed by the individual Trustee.”

Are there any specific requirements for a successor trustee?

The trust agreement stated that the successor corporate Trustee must be a “bank or trust company.” This broad definition gave the individual co-trustee great flexibility, and I counseled her to separate fiduciary functions from investment management.

Whom do you notify?

Together, we identified a successor corporate trustee. It was a bank that provided fiduciary and administrative services – without call centers. Although the bank retained veto power over outside money managers, it quickly approved the one we proposed.

While the trust document did not require the co-trustee to notify other beneficiaries, the successor trust company did. And while you might have the power to make changes, it is always important to consider how beneficiaries will respond to the change.

Compare Costs

The co-trustee and I compared the historic investment results of the existing corporate trustee to our proposed successor. But past results do not guarantee future performance. So, we focused primarily on cost differences to compare the two approaches, which the following table illustrates.

1. Actual
2. Quoted
3. Annualized % fees for the month ending 12/31/2016
4. Weighted Average Expense Ratio based on Ending Asset Allocation
5. Weighted Average Expense Ratio based on Replacement Asset Allocation

The co-trustee realized she could cut the trust’s annual fees by 32% annually. (Calculated as follows: $6,818/$21,347 = 32%.) But she worried about the tax consequences from changing trustees. There were roughly $285,000 in unrealized capital gains, and the new money manager planned to liquidate all securities. She also knew that the existing trustee would charge termination fees and wondered whether changing trustees would yield a better outcome for her family.

Identify Barriers to Switching

Several variables would determine the success (or failure) from switching corporate trustees: investment performance, quality of fiduciary decisions, and clarity of reporting among others. There was no way to be certain about the outcome in advance. But it was relatively simple to identify the immediate out-of-pocket expenses.

Total Costs Incurred Now were 3.86% of total assets. This number seemed modest number relative to the S&P 500’s annualized returns of 9.65% from 1928 through 2017. But annual compounding is a powerful force. We wondered what the trust could earn on $58,500 if not forced to incur the costs.

The short answer was, “Who knows?”

It was impossible to predict market returns. Similarly, it was impossible to predict when the existing trustee would realize the $285,000 in capital gains — if ever. But we had framed the decision. That is, was it better to 1) incur costs of $58,500 now in exchange for annual savings of roughly $6,818 in fees and operating expenses or 2) hope for better service and performance from the existing trustee in the future?

What Would You Do?

Sometimes, there are no right or wrong answers, just decisions to make in the absence of perfect information. I recommended the family change corporate trustees for three reasons:

• Estimated savings of $6,818 per year
• Miscellaneous service considerations
• Separation of fiduciary from investment functions because I have never known a financial institution to fire itself for underperformance.

While the family trustee was deciding what to do, there was one final wrinkle. The existing corporate trustee notified the family that it was raising fees .10% in line with its firm-wide schedule. This increase would, in effect, increase the annual savings from $6,818 to $8,333 under the proposed arrangement. No phone call. The co-trustee received a form letter, which in the end made her decision really easy.

If you are considering a change in trustees and would like a second opinion, send us an email. We’d like to hear from you.