Trust administration provides the key ingredient or secret sauce to any trust experience.
In this blog, I will briefly go over the key pieces to great trust administration. As a co-founder of an advisor-friendly trust company, we understand the frustrations advisors and beneficiaries have with a bank trust departments.
Let's start working through how trust administration works and why. Knowing this information and knowledge gives you the power to pick a trustee based on your terms.
Trust Administration Versus Trust Accounting
The super large majority of financial advisors, CPAs, grantors, and beneficiaries become confused with trust administration versus trust accounting.
Trust administration allows the trustee to make decisions. Examples of those decisions include investment decisions, distribution decisions, and tax decisions.
Trust accounting captures those decisions in principal and income statements, tax reporting, distributions and any proxy voting on trust assets. Another way to consider the difference: Trust administration needs proactive thought and planning. Trust accounting just captures trust administration actions. Trust accounting should be considered a commodity.
Administration for a Will Versus a Trust
Financial security is vitally important as the Baby Boomer generation (or really anyone) moves toward their golden years. Unfortunately, bad financial moves leave many Americans scrambling to figure out how they’re going to cover medical expenses on top of routine living costs. 1
Deciding early on what you want to be done with your assets is a safe and sure way to ensure financial security throughout old age. This plan normally becomes captured within a Will or a Revocable Trust. Leaving your assets and your future without a thorough plan is dangerous for both you and your wealth. 2
Your Will needs to choose an executor to follow your instructions after you pass away. Without the proper planning the estate administration process can be long, difficult, and unwavering to your wishes. Choosing an executor — a horrible job for anyone — should not be done lightly. After the estate has been settled (IRS taxes paid, debtors paid and heirs paid), some families create trusts within their will. The administration of a trust bears no resemblance to the administration of your estate.
Many trusts limit distributions to HEMS — Health, Education, Maintenance, and Support expenses. These costs are subjective and based on each family’s definition and importance of different values.
While some families transfer the vast majority of their estate to charities, most Americans transfer their wealth to their children and grandchildren. 3 Proper safeguards provided by the trust administration process allows a backup plan for many scenarios, including the possibility of mental or physical incapacitation.
Brooke Astor, the New York City-based widow of an Astor heir, slipped into dementia while enduring years of abuse by her money-hungry son. 4 After the legal battle leaked to the press, Ms. Astor will be remembered less for her philanthropy and more for the tabloid coverage of the elder abuse she endured. 5
When families consider the type of trustee for their trust their are two options: (1) Family member or friend; or (2) Corporate trustee.
The process of deciding how to pick a trustee does not come easily. The control of a trustee, unchecked, can yield horrible consequences. A trustee has the power to move assets outside of the trust, make all the investment decisions and provide the final answer on distribution decisions.
If using a family friend or family member as the trustee consider the use of a trust protector. These role provides power to keep the trustee accountable for their actions.
For example, the trust protector could have the power to receive trust statements, to remove the trustee, to appoint a trustee or even to change the governing law of the trust itself.
The Effect of Bad Trustee Selection
Proper estate planning with a third party neutral that has the right to step-in when a health crisis occurs is a vital safeguard of proper property trust administration. When a Manhattan doctor stole his mother’s last $800,000 prosecutors called the case an “Astor copycat” in that wealth crimes affect all classes and all walks of life. “I think people think this sort of thing doesn’t happen in families like that, that it’s somehow a lower-economic tragedy.” 6
Similar to the Astor case, the doctor lived lavishly off his mother’s wealth while she faced eviction when he stopped paying her bills. 7 Experts have repeatedly urged the safety of a proper trust administration with safeguards for elder and financial abuse. 8 This pre-planning is not only smart, it is essential to protecting the long-term safety of your wealth and well being through the trust administration process.
These safeguards are important for families with young children, too. For “the protection of their rights and interests” the New York Supreme Court appointed a former New York City mayor as guardian of nearly $6 million in trusts for the grandchildren of a wealthy heiress. 9 The mayor had no connection to the family and stood to make a sizable fee administering the trust. The children’s mothers contested and spent money meant for the children on attorneys’ fees and court cost—all because of bad trust administration.
These issues are easy to address and can be remedied by creating a special needs trust based on a handicap if occurred at birth or after the parents or grandparents pass away. At this point, separate trusts for each beneficiary become even more important as one beneficiary with more expensive needs can easily drain the trust. 10
Cautious trust creators concerned with beneficiaries living above their means can limit trust disbursements through a spendthrift provision or within specific rules of trust distributions.
A spendthrift provision is a safeguard in the trust administration process to prevent beneficiaries from wildly living above their means and eroding the wealth earned through their parents or grandparents work. 11 One statistic estimated the average person buys a new car within 19 days of receiving an inheritance. 12
In England, trust friendly laws meant the 25-year- old Duke of Westminster inherited an estimated $13 billion on his father’s death in an unbroken chain of inheritance by the firstborn male that has gone on for centuries. 13 Because of safeguards in the trust, future beneficiaries are protected from spending too much or depleting the estate by current beneficiaries.
Additional benefits of trust administration safeguards including protecting your assets from bill collectors, divorcing spouses, and lawyers seeking to collect against your beneficiaries. Assets inherited by a beneficiary with special needs may ultimately lose access to government benefits or lose their inheritance to pay for government services. 14
Understanding the need for thorough safeguards in the trust administration process is essential for relatives with special needs or beneficiaries with perhaps untrustworthy spending habits. The trust administration is the secret sauce for any successful trust experience.
In sum, placing safeguards within the trust administration process is an easy and secure way to ensure the disbursement of your assets as you see fit while protecting your beneficiaries from themselves, greedy ex-spouses, or mounting medical debt.
The secret sauce of trust administration comes within how the trust document language but just as importantly the DNA of the trustee. Corporate trustees using 800 numbers or trust officers with 400 trust accounts do not have the time to make proactive and wise decisions.
Trust administration does not follow clear and neat math formulas. It must take into account human situations and emotions along with the rules laid out inside the trust document.
Learn More about Trust Administration
You can learn more about trust administration by reading our comprehensive guide.
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