One of the most crucial estate planning questions is this: Who should you designate to step-in and manage your financial affairs if the day comes when you no longer want to, or are no longer able to, continue to do it yourself?
In my experience, most people don’t give much thought to this question, even though they will be trusting this person with their life savings and financial security. People typically choose a family member, perhaps the oldest child or the one with whom they feel closest. This person may or may not be the best choice. They may not have the time and ability to effectively deal with the burdens of managing another person’s financial life.
Another option for many people is to hire a professional company to manage their finances if and when the appropriate time arrives. There are trust companies in most communities that specialize in this kind of work.
Many people who could benefit from the services of a trust company never even consider this option. They may think, incorrectly, that you need to be a millionaire to set up a professionally managed trust. But this is not the case.
In this article I want to try to clear up some misunderstandings about trust company services. I want to try to help you answer the question: who should I choose as my financial surrogate – a family member or a trust company. It is written from the perspective of an elder law attorney who is not an employee of a trust company. However, while I have no financial interests in any trust company, my wife and I have set up a revocable trust with a trust company. This means I have both professional and personal experience with using trust companies.
What is a Trust Company?
When I use the term “trust company” in this article I mean a corporation that is authorized to handle assets for the benefit of others. Although trust companies are often associated with banks they have different functions. A trust company serves as custodian of and provides investment and financial management services for funds that remain owned by the person setting up the trust or agency or by the trust beneficiaries. This means that customer’s trust funds are not subject to the creditors of the trust company or any associated bank. It also means that trust companies do not have commercial banking powers and are not insured by the FDIC.
Some trust companies operate in only one state while others are national. Trust companies vary greatly in terms of the size of accounts they require and the fees they charge. So, it is important for the consumer to shop carefully to find a trust company that makes a good fit with the consumer’s particular circumstances and needs.
Powers of Attorney and Trusts
Two primary methods of authorizing another person to manage your financial matters are the power of attorney and the trust.
In my experience, most people who choose to name a family member as their financial surrogate use the power of attorney approach. With a power of attorney one person (the “principal”) gives another person (the “agent”) the authority to make decisions for and manage the financial and other assets of the principal to the extent authorized in the document. With a power of attorney, the legal title to assets remains with the principal.
The typical way to authorize a trust company to act as your financial surrogate is through creation of a revocable trust. The person setting up the trust (the “settlor”) signs a trust agreement which gives the settlor’s directions for the trust. With the assistance of the trust company any assets the settlor wants managed are then re-titled in the name of the trust. The trustee then manages the trust assets in accordance with the directions of the settlor. Everything is revocable, which means the trust can be modified and even cancelled by the settlor in the future.
These are the typical arrangements. However, there is nothing that prevents a family member from serving as a trustee or a trust company from serving as an agent. Trustees and agents may be an individual, more than one individual, or other entities if the entity is authorized to act as a fiduciary.
For more information on powers of attorney and trusts see my article, Financial Power of Attorney and Trust – Understanding the Differences.
Agents and Trustees as Fiduciaries
Agents and trustees are normally going to be consider to be “fiduciaries” which means they owe a high duty of loyalty, responsibility, and prudence towards the other parties to the relationship. These fiduciary duties are typically not stated in the trust or power of attorney document but are specified by laws and court decisions. Trustees and agents may be required to account for their actions and can be held financially liable for any violations of their fiduciary duties.
For more information on the duty of agents to account for their actions see my article Accounting for your Actions as Power of Attorney.
Family Member or Trust Company – Weighing the Advantages
At some point you may need some help in managing your financial life. Should you hand this responsibility over to a family member? Or should you choose a trust company to serve this role? Give this question some serious thought. The choice you make may be crucial to your future financial security and to the well-being of your family.
There are some advantages of choosing a family member as your financial surrogate and some of using a trust company. I’m going to discuss some of the perceived advantages of each approach in the hopes of helping the reader make the best decision.
First, I want to discuss some of the perceived advantages of choosing a family member.:
Discussion of Possible Advantages of Choosing a Family Member as your Financial Surrogate
- No Financial Threshold. A family member will serve even if you have very limited assets. Even if you are living month to month with no savings, a family member can step in to manage your checking account and pay your bills, taxes, and insurance premiums, and sign contracts for services you need.
If you have no savings a trust company will be unlikely to accept you as a client. Trustees typically charge for their services based on a percentage of the funds being managed, with a minimum annual fee. If you have no funds to manage you will still have to pay the minimum fee.
Percentage rates and minimum fees vary widely among trust companies. You need to shop around.
Smaller trust companies are likely to have the lowest minimum fees and percentage rates. There are small trust companies who charge a minimum annual fee of $1,500 or less. I am aware of one whose current minimum fee is only $500. This makes a small trust company a viable financial management option for individuals and couples with as little as $50,000 to manage.
But for individuals who truly have no savings a family member may be the only option.
- Initial Simplicity. Although some trust companies are willing to serve as agents under power of attorney, most prefer that their clients create and fund a trust. Family members are generally more willing to serve as agents which requires no re-titling of assets. (Re-titling means changing the legal title on assets from you individually to your trust). Because re-titling is not involved with a plan based on a power of attorney, it may be simpler to implement, at least initially. However, third parties (e.g. stock brokers, banks) are less likely to readily accept the authority of a family member acting under power of attorney than of a trust company especially where a trust has been funded. So, the simplicity advantage of the family member-power of attorney approach may be short-lived.
- Family Members may Decline to Charge for their Services. Although generally entitled to a fee, a family member who serves as your agent or trustee may decide not to charge for their services. A trust company will charge. But, see the further discussion of fees below under the topic “Experience.”
- Desire to have Family Members involved in certain Financial Decisions. The Principal may want to have a family member in charge of some types of financially-related decisions. For example, the principal/settlor may want a family member to review and sign contracts for services (e.g. home health aides), or to make decisions regarding gifts to children and grandchildren. However, the family member can be given this authority as part of a trust company-based plan. A trust company can handle the investments and pay the bills while the family member makes the more personal financial decisions. The family member and trust company can even be named as co-trustees. So, this perceived advantage may not really exist at all
Discussion of Possible Advantages of Choosing a Trust Company as your Financial Surrogate
- Experience. If you need heart surgery you are probably better off seeing a doctor who has performed your surgery hundreds of times before rather than never. It is similar with managing financial matters like investing. Experience helps. A lot. It increases the likelihood that you will get higher investment returns with more safety. This experience factor offsets the perceived advantage of choosing a family member who doesn’t charge for services. For example, you are going to be better off with a trust company that earns you a 4% return and charges a 1% fee (3% net return) than with an inexperienced family member who earns only 1% and does not charge a fee (1% net return).
- Prudence. Consistent with your goals and directions, a trust company is more likely to try to provide you with a diversified, safe investment portfolio. An inexperienced family member is more likely to choose investments that are either too conservative or too speculative. A trust company’s emphasis on prudence may help protect you from the poor investment returns or even losses that may be incurred by a well-meaning but inexperienced family member.
- Oversight. In addition to having fiduciary responsibilities, trust companies are subject to government regulatory oversight and audit similar to that imposed on banks. This provides you with an extra measure of protection against improper actions.
- Stability. Your family member may get sick or die. A trust company will survive the illness or death of any individual.
- Conflict Avoidance. A family member who is serving as your agent is often also a potential beneficiary of gifts and other financial rewards from you during lifetime or at your death. This can create a potential conflict of interest for your family member-agent. Even if the agent tries hard to be fair and impartial, other family members may perceive differently. This can create suspicion and emotional strain in your family. These concerns are avoided with a trust company.
- Systems. A trust company is going to have systems already in place to ensure that taxes and other bills get paid and other actions are taken in a timely manner. A family member may have to create such systems from scratch and is more likely to make mistakes, like failing to make timely payment of a bill.
- Reporting. A trust company will provide you with a regular written accounting of all of the actions it takes on your behalf including all investments and payments. Such reporting is unlikely if a family member is administering your finances.
- Burden Avoidance. Acting as someone’s financial manager is difficult and time consuming. A trust company can relieve family members from these burdens.
- Impartiality. A trust company can serve as a financially and emotionally neutral third party. It can help limit and resolve family disputes and avoid discord.
- Confidentiality. A trust company will provide confidentiality for your financial information. Maintaining confidentiality is much more difficult when a family member is handling your finances.
- Avoiding Legal Jeopardy for your Family Member. There is a constant flow of cases in the courts involving family members being sued civilly and even criminally for their actions as dad or mom’s agent under powers of attorney. Cases are brought by other family members and by governmental entities. A family member who has failed to keep detailed records of all actions, or made mistakes out of ignorance can be in very real legal jeopardy.
- Better Acceptance. Family members who are serving as agents often run into problems having a power of attorney accepted by a bank, brokerage, or other third party. Acceptance of your financial surrogate’s authority is typically improved if the surrogate is a trust company. This allows your transactions to take place more quickly and smoothly.
Who should you Choose as your Financial Pinch-Hitter: A Family Member or a Trust Company?
As you can see, there are numerous advantages to having a trust company serve as your financial surrogate. Or perhaps a trust company and a family member should be named to serve together. If you have a modest amount of savings and investments (e.g. $50,000 or more) a funded and professionally managed trust may be a good planning solution for you. If you live in Pennsylvania you can talk about it with an elder law attorney at Marshall, Parker and Weber.