When our clients are in the process of choosing a trustee, they ask us a great many questions. Some of their most frequently asked questions can be read below along with real-world examples as supplemental answers.
But if your particular question is not listed here, we welcome the opportunity to discuss why you may need a professional trustee, why you may need a co-trustee, why selecting an executor is important, and more. We asked James O’Neil, an estate planning attorney based in the San Francisco Bay Area (https://oneil.legal/) for some candid answers based on real-world examples.
What exactly is a trust?
A trust is a legal agreement between three parties that names a person or entity to hold property for the benefit of others:
- The person who creates the trust is called the “settlor” or “trustor” or “grantor”; the settlor also normally provides (“grants”) the assets to be held in a trust.
- The person or entity holding and managing the property is called the “trustee”.
- The people for whom the assets are managed are called the “beneficiaries”.
A settlor creates a trust and transfers the property to the trustee with instructions (found in the trust document) to manage and distribute the property to each and all of the beneficiaries. The settlor, trustee and beneficiary can all be the same person(s) initially.
Real-world example from James: A revocable living trust is like a jar. It only has power over the assets you put inside of it. If the asset is not inside, the power of the trust does not apply to it. One way to include the assets is to title them into the name of the trust. You can complete beneficiary designation forms for insurance policies or retirement accounts to include them. A third way is to create a “pour-over will”; its goal is to ensure than any assets not previously included are transferred into the trust.
Why should I consider a trust?
Real-world example from James: There are five broad categories to consider for an average person’s trust:
- To avoid probate: This applies to people who have over $166,000 in assets in California. We cannot distribute these assets – typically a house’s value –– without going to Probate Court. This usually takes one to two years in time to marshal the assets through the court before an order is granted to distribute assets. The legal fees are set by law at a sliding scale percentage; the attorney and the executor are paid the same amount based on the fair market value of the assets.For example, if there is a California house with $200,000 in equity and an $800,000 mortgage, the legal fees are calculated on the $1,000,000 total value. It equals $23,000 payable to the attorney and another $23,000 payable to the executor, at minimum, or nearly 25% of the home’s equity.
- To keep your affairs private: There is an entire industry of third-party “actors” who keep an eye on probate filings that can be accessed online in some counties. These people can include inheritance funding companies offering pennies on the dollar for a quick payment of the inheritance to the end beneficiaries, realtors promising a quick sale of the deceased’s home, and more.
- To protecting vulnerable people: Children (minors under 18) cannot inherit assets outright so their money will need to be managed through the trust until an age when they can receive it responsibly, typically 25 to 30 years old. For developmentally disabled beneficiaries or those with addiction issues who may never be able to manage their assets responsibly, the trust can ensure the trustee provides for the rest of their lives, while still enabling them to quality for public benefits.
- To avoid Medi-Cal reimbursement: Assets placed under a revocable living trust avoid reimbursement from Medi-Cal, which preserves the assets for both the trustee and the beneficiaries.
- For tax planning purposes: This includes estate, gift, generation skipping, and capital gains taxes, as well as tax planning.
What is Sunstone Trust’s role as a chartered trust company?
Sunstone Trust Company acts as a fiduciary with respect to all of your trust assets. This means that Sunstone can act as trustee of your trust to hold, to manage, and to account for your wealth in your best interest. Sunstone Trust Company can also be trustee during your life, should you become incapacitated or after death. In addition, we can act as executor to professionally settle estates and distribute assets.
Real-world example from James: A substantial amount of litigation in my practice arises from an ill-informed trustee acting to the detriment of other beneficiaries of the trust. A family member’s experience does not typically enable them to manage a trust, no matter how complex or simple it is.
At his/her heart, a good trustee should be competent with the following services which are authorized by Sunstone Trust Company:
- Act as your fiduciary with experience in real estate to oversee and to manage your holdings.
- Have a good working knowledge of tax, trust and estate laws.
- Possess financial management and investment skills to oversee your securities portfolio (stocks, bonds, and mutual funds), as well as to invest and reinvest the trust property and exercise discretionary powers over income and principal for your trust.
- Act as trustee for your closely held businesses.
- Work as an intermediary between legal counselors, tax advisors, bookkeepers, and accountants for all of your ongoing trust estate needs.
- Separate their professional role from a fiduciary role as trustee.
This is quite a lot for one person to handle who has no background in any of these critical areas, which is why it’s so important to hire a company that can act as your fiduciary.
I have an investment adviser. Do I also need a trust company?
Yes, because they provide two different roles. You can (and you frequently should) keep your existing trusted investment advisor. While a trustee and an investment adviser can both manage your assets, a trustee such as Sunstone Trust Company can provide additional essential services that most investment advisors cannot. These can include:
- Serving as a trustee of your family trust
- Acting as an executor or settling your family’s estate
- Holding custody of your assets
- Allowing you to invest your IRA into non-traditional assets
- Helping you manage non-traditional assets such as real estate, closely-held businesses, and cryptocurrency
Sunstone Trust Company can work with your existing investment adviser who can continue to manage your traditional securities portfolio, while Sunstone Trust Company can provide custody of assets and accounts for the remainder of your estate including your real estate, business interests, and bank accounts.
Real-world example from James: I’ve never had a litigation case where I had a trust company as the trustee. The problems almost always arise when a family member who has no expertise in managing a trust either defrauds the trust or so wildly mismanages the assets as to waste them.
You should be able to count on both an investment adviser and a trust company’s experience. A seasoned investment advisor can maximize your return on investment, while a skilled trustee ensures that he/she can provide additional essential services and compliance with the trust itself through a deep pool of human capital for tax, legal, and trustee advice.
Why would you hire a professional trustee instead of doing it yourself?
For a variety of reasons, many families use a professional trust company to be their trustee instead of trying to act as their own trustee. These include:
- For non-professionals, acting as trustee can be a burden on their time and peace of mind
- A professional is best to handle the complexity of modern trusts
- Trust and tax laws are complex and change often
Real-world example from James: Most trust attorneys like me can regale you with anecdotes about cases involving families who sue each other because of the absence of a professional trustee. Families tend to get increasingly distrustful because of the lack of transparency and accountability when large sums of money are involved and the trustee is typically in the crosshairs of that debate.
Choosing a trustee is difficult. You typically want to hire a relative – someone who was close to the person who created the trust – but what if a sister suddenly needs money to pay an emergency medical bill and is the trustee; she plans to repay the trust, but something happens and she never can. Then what happens if she passes away?
A trust company does not suffer from these faults. They’re well-resourced, well-educated, and very experienced in all aspects of administering the trust, and set-up for generations to come.
This has been Part I of “Frequently Asked Questions About Why You Need A Professional Trustee”. We will post Part II next month.