A Self-Trustee Needs Time and Skill

Most investors worry about the financial well being of their children and grandchildren, yet even the wealthiest fail to create trusts to efficiently transfer their estates to future generations.

Only 38 percent of investors with a net worth of $1 million to $5 million have assets held in trust. Wealthier investors are more likely to have trusts – 55 percent of investors with a net worth between $5 million and $25 million, and 65 percent of investors with a net worth of $25 million or more have assets held in trust – but a significant percentage have failed to protect their wealth from estate taxes and legal proceedings, according to surveys conducted in December by Spectrem Group. (Spectrem does not include the value of a primary residence when calculating net worth.)

An individual - or grantor – sets up a trust as part of an overall estate plan and selects others - typically family members or charities - as beneficiaries of the trust. The grantor funds the trust with assets that become the property of the trust, and appoints a trustee to manage the trust for the good of the beneficiaries. In a trend that saves fees and gives more control, grantors are appointing themselves as trustees. The percentage of investors who self trustee grew from 75 percent in 2009 to 93 percent in 2010 among millionaires with a net worth of $1 million to $5 million.

“It’s important to remember that many millionaires who self trustee also rely upon financial planners, brokers, accountants and lawyers to manage the assets held in trust,” said Catherine McBreen, managing director of Spectrem Group. “The larger an estate, the more complicated retirement and succession planning tends to be. Most wealthy investors have a better outcome when they consult with experts, particularly when it comes to tax and estate law.”

Wealthier investors are slightly more likely to appoint a professional as trustee, but the overwhelming majority serve as their own trustees. Eighty-seven percent of investors with a net worth of $5 million to $25 million serve as their own trustees, as do 41 percent of investors with a net worth of $25 million or more.

Investors who chose to act as their own trustees need the time, knowledge, skill and inclination to properly manage the assets held in trust. The job of a trustee can last for years and the duties can seem overwhelming. The trustee bears the “high fiduciary duty” of acting in the best financial interests of the beneficiaries, and is vulnerable to lawsuits from disgruntled beneficiaries

Trustees are also responsible for keeping records, filing annual tax returns and distributing the assets of the trust in accordance with its terms. Trusts can be established for a range of reasons, such a paying for a grandchild’s college costs or providing supplementary income to a disabled adult.

Corporate trustees charge management fees that can seem prohibitive to investors with small estates, but they provide the advantages of impartiality, professional expertise and continuity should an individual trustee become unable to do the job.