Should You Name a Bank as Trustee of Your Trust?

A trust is an excellent way to bestow wealth, but disbursing money to your beneficiaries hinges on a crucial party: the trustee. Your trustee’s financial knowledge, discretion and accountability will influence how a trust impacts beneficiaries. These duties can be overwhelming for one person to manage, especially if they’re a family member. Fortunately, a trust can have an institutional trustee, such as a bank, that oversees the acts of a trustee on your trust.

For help with creating and managing a trust, consider working with a financial advisor.

What Is a Trustee?

A trustee is an entity that manages wealth, assets or property on behalf of the owner of the estate. The owner, also called the trustor, appoints a trustee to act in the trustor’s best interests. A trustee usually has fiduciary status, meaning the law requires them to administer the trust to the benefit of those named in the trust.

Trustees operate under a fiduciary duty, which is one of the highest standards of care recognized by law. This means they must put the interests of beneficiaries ahead of their own, avoid conflicts of interest, and manage trust assets prudently. Trustees must also maintain accurate records, file necessary tax returns, and provide regular accounting to beneficiaries. Failure to uphold these responsibilities could result in personal liability for the trustee.

Trustees come in various forms depending on the trust’s needs. Individual trustees might be family members or close friends who understand the grantor’s wishes. Professional trustees include banks, trust companies, or attorneys who bring specialized expertise to complex situations. Some trusts employ co-trustees, combining personal knowledge with professional management to achieve the best outcomes for beneficiaries.

Responsibilities of a Trustee

Managing a trust or estate is a multifaceted task. The trust document defines what a trustee can and cannot do with trust assets. Common powers include the ability to invest funds, sell property, pay expenses, and distribute income or principal to beneficiaries. However, trustees must always operate within the boundaries established by the trust document and state law. Even with broad discretionary powers, trustees cannot act arbitrarily or against the trust’s stated purpose. Here are some examples:

Accurate Documentation

Trustees must log the trust’s activity, including withdrawals, expenses and income. In addition, they must ensure the activity follows the trust’s dictates. For example, beneficiaries might only have access to the trust’s income and not the principal.

In addition, the trustee administers the assets according to state laws, which differ across the country. As a result, the trustee will likely have to be well-versed in trust regulations for multiple states.

Trustees also manage the filing of the trust’s tax returns. Specifically, the tax returns should be on time and owed taxes paid promptly. Remember, the IRS can audit a trust, so it’s up to the trustee to ensure the trust complies with tax laws.

Disbursements to Beneficiaries

Trustees field monetary requests from beneficiaries, meaning they decide how much money beneficiaries receive and when. These decisions involve weighing the needs of the present against future circumstances. Because trustees have the authority to withhold money from beneficiaries, their sense of fairness and practicality is crucial.

For example, say a trust has two sisters as beneficiaries. The older sister wants the trustee to sell some stock within the trust to fund her ambition to fund her startup. Meanwhile, the younger sister recently had a child and wants to ensure the trust will fund their education in the future. The trustee must make decisions in challenging situations, taking account of the trustor’s original wishes and the dynamics of the beneficiaries’ lives.

Investing

Trustees must make investment decisions in light of beneficiaries’ needs and lifespans. Therefore, trustees allocate investments based on when beneficiaries will withdraw money in the future, the amounts they request and retaining as much of the principal as possible to create future investments. Plus, trustees usually diversify investment portfolios to reduce risk.

Why It’s Important to Name the Right Trustee

Should You Name a Bank as Trustee of Your Trust?

Naming the right trustee is one of the most consequential decisions you’ll make when establishing a trust. This individual or institution will be responsible for managing and distributing your assets according to your wishes, potentially for decades after you’re gone. The trustee’s decisions will directly impact your beneficiaries’ financial well-being and can either fulfill or frustrate your legacy intentions.

Your trustee needs sufficient financial acumen to manage investments, handle tax implications, and make prudent decisions about trust assets. Without this expertise, even well-intentioned trustees might make costly mistakes that diminish the trust’s value over time. Professional trustees often bring specialized knowledge that family members may lack, particularly for complex or substantial estates.

Trust administration often spans decades, requiring a trustee with staying power. Individual trustees may face health issues, move away, or simply become overwhelmed by responsibilities. Institutional trustees offer continuity that individuals sometimes cannot, ensuring consistent management throughout the trust’s duration.

Benefits of Naming a Bank as a Trustee

When establishing a trust, selecting the right trustee is crucial for ensuring your assets are managed according to your wishes. While many people consider family members for this role, naming a bank as a trustee offers several distinct advantages that can provide peace of mind and professional oversight.

Professional expertise and experience: Banks employ trust professionals who specialize in asset management and fiduciary responsibilities. These experts understand complex tax laws, investment strategies, and distribution requirements that might overwhelm individual trustees, ensuring your trust is administered with professional competence.
Continuity and permanence: Unlike individual trustees who may become ill, pass away, or simply decide they no longer want the responsibility, banks provide institutional permanence. This continuity ensures your trust will be managed consistently over decades, which is particularly important for trusts designed to last for multiple generations.
Objectivity in decision-making: Banks make decisions based on fiduciary duty rather than emotional ties. This impartiality can be invaluable when handling sensitive family dynamics or when difficult decisions must be made about distributions, preventing potential conflicts that might arise with family trustees.
Regulatory oversight and accountability: Financial institutions operate under strict regulatory frameworks that provide additional layers of protection. Banks undergo regular audits and must maintain compliance with financial regulations, offering beneficiaries greater security and recourse than typically available with individual trustees.

The benefits of naming a bank as a trustee can be particularly valuable for complex estates or situations where professional management is essential. While bank trustees do charge fees for their services, the expertise, continuity, and objectivity they provide often justify the cost, especially when considering the long-term protection of your legacy and the welfare of your beneficiaries.

Drawbacks of Naming a Bank as a Trustee

While banks offer professional trust management services, there are several important considerations before naming a bank as your trustee. Understanding these potential drawbacks can help you make a more informed decision about who should manage your trust assets.

• Higher fees compared to individual trustees: Banks typically charge annual fees based on a percentage of assets under management, often ranging from 1-2%. These fees can significantly reduce the trust’s value over time, especially for smaller trusts where minimum fees may represent a larger percentage of assets.

• Impersonal service and potential staff turnover: Unlike a family member or friend serving as trustee, banks operate through teams of professionals who may change over time. Your beneficiaries might work with multiple trust officers throughout the life of the trust, potentially creating inconsistent service and relationships.

• Rigid policies and conservative investment approaches: Banks often follow standardized procedures and may be less flexible in responding to unique family situations or beneficiary needs. Their investment strategies typically prioritize capital preservation over growth, which might not align with your financial goals or risk tolerance.

• Limited availability for smaller trusts: Many corporate trustees establish minimum trust sizes (often $500,000 or more) to accept management responsibilities. Smaller trusts may face higher percentage fees or be declined entirely by institutional trustees.

• Potential for conflicts of interest: Banks may favor their own investment products or services, potentially creating conflicts between maximizing trust performance and generating revenue for the institution.

When considering the drawbacks of naming a bank as a trustee, weigh these factors against the benefits of professional management. For some situations, a combination approach using co-trustees (one individual and one institutional) might provide the optimal balance of personal attention and professional expertise.

Should You Name a Bank as Trustee of Your Trust?

As with any momentous financial decision, it’s vital to weigh your circumstances and needs. Naming a bank as trustee might be right for you if the following conditions apply:

You find a bank that communicates its services and trustee fees
Your current trustee lacks the skills to administer the trust.
Your family needs an objective voice about distributions and investments.
You’re concerned about the welfare of future beneficiaries.
You have consulted an attorney about the trust.

On the other hand, naming a bank as a trustee might not fit your situation. For example, you and your sibling might be the beneficiaries of the estate your parents left. Your sibling is the trustee. The trust’s investments are performing well, and your sibling pays annually for a professional to file taxes for the trust. There is no friction between you and your sibling, and you both take equal distributions every year. In that case, naming a bank as a trustee is unnecessary.

Bottom Line

Naming a bank as a trustee can benefit trustees by eliminating emotional decisions, providing financial expertise and delivering excellent service over the trust’s lifespan. However, understanding the bank’s fees is crucial, and it’s helpful if the beneficiaries have the right to name a new trustee in case the bank does a poor job. That said, a bank as trustee can take the stress off of family members acting as trustees and provide needed objectivity for the trust’s financial functions.

Tips for Naming a Bank as Trustee

A financial advisor can help with any issues around trusts. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goal, get started now.
Trusts aren’t a one-size-fits-all solution to passing on wealth to beneficiaries. Your circumstances are unique, and your trust should reflect this. Use this guide to different types of trusts to understand which suits you best.