Ask the Probate Judge—Corporate Fiduciaries
Rudd, appeared January 18, 2007, Albuquerque Journal, Business Outlook
Reprinted with permission
Editor's note: This column may not be quoted or reproduced in whole or part without express written permission of the author.
Q: I am curious as to what a bonded corporate fiduciary is and does, compared to the executor or trustee. I am retired and have named an older friend as trustee in my revocable living trust. My next younger sister, age 70, is the alternate. My only heirs are my sisters, who will get a little, with most of my assets going to charity. I am slowly downsizing, but still think that if I died tomorrow, my sister would follow with a heart attack if she saw what she had to clear out and do. My estate is less than $1,000,000 in value, half of which is the value of my house. Should I just name a corporate fiduciary? Please describe a corporate fiduciary and how one appoints that person(s).
The term "fiduciary" generally describes personal representatives, trustees, conservators, executors or other people or corporations serving in a confidential position of trust involving financial matters. "Fiduciary responsibility" means that the person (or corporation) serving in such capacity is held to a high standard of care and good faith.
A "corporate fiduciary" is a corporation that is in the business of providing fiduciary services. Corporate fiduciaries can be banks, trust companies, or individuals who act as professional fiduciaries.
The term "bonded" means being insured (or capitalized) to the extent the fiduciary can pay for any damages incurred due to the fiduciary's possible negligence or malfeasance.
A person could decide to appoint a corporate fiduciary instead of an individual fiduciary, such as a family member.
Corporate fiduciaries provide a wide variety of services, including investment management, management of unique assets (such as real estate, oil and gas, personal property, etc.), coordination of health services, insurance claims processing, income tax preparation, bill payment, and many others.
Some things to consider before appointing a corporate fiduciary include:
- Costs: Although they are entitled to "reasonable compensation," family members or friends might serve for little or no compensation. Corporate fiduciaries charge a fee for their services, typically a percentage of the market value of the trust assets or probate estate. Depending on the value and complexity of the assets to be managed, the annual fee is usually about 1 to 1.2% of the value of the assets, so it is important to apply the fee schedule first to be certain the cost is justified.
- Skills: Administering a trust or probate can be very complex and time-consuming. Corporate fiduciaries are held to a standard of professionalism that includes verifiable expertise in a variety of areas including trust and probate law, investment management, taxation, and accounting. The standard and the expectations of an individual fiduciary are typically much lower, which sometimes results in a poorly handled engagement, unnecessary tax exposure, and possible losses to the estate.
- Liability: Although the assets of a trust or probate might be substantial, the liability exposure of an individual fiduciary would likely be limited to the net assets of that individual. A corporate fiduciary's liability goes directly against the balance sheet of the fiduciary's corporation.
- Availability: Some individuals may be daunted by the responsibility and time commitment required; others may relish the tasks. When an individual is named in a trust or will, there is a risk that the individual may predecease or otherwise be unable to accept the appointment. A corporate fiduciary typically will be available regardless of what happens to individual trust officers and other professionals. Even when banks with trust powers are acquired by other banks, the law and the legal document typically provide that the successor steps into the position of the originally-named fiduciary.
- Family Dynamics: Over time, even corporate fiduciaries can develop close relationships with beneficiaries in order to provide individualized services. However, a corporate fiduciary is rarely involved at a highly personal (emotional) level. Individual fiduciaries may be more susceptible to family pressure in certain instances. A professional fiduciary can sometimes provide objectivity and professional discretion in administering trusts and estates that benefit family members who may be less experienced, cooperative, and/or sophisticated in matters of tax, investment, insurance and the law.
People should evaluate their own family dynamics to determine whether an individual or corporate fiduciary is preferable for their particular circumstances. Generally, trustworthy individual fiduciaries, such as family members, can handle smaller, less complex arrangements with the help of an attorney or CPA. Corporate fiduciaries may be appropriate when there are more complex business matters or strained family relationships.
You might interview potential corporate trust officers at your local bank or trust company to learn more. If you decide to appoint a corporate fiduciary as your trustee, a simple trust amendment should accomplish your goal.
Thanks to my colleagues at a large bank and a local trust company for their help with this column.
© 2007, Merri Rudd & Albuquerque Journal, All Rights Reserved