Corporate Trustee vs. Individual Trustee: How to Choose

The trustee you name may still be making decisions about your family’s money decades after you, your attorney, and your present advisers have left the room. When you and your husband signed your plans, the choice may have been simple: each of you for the other, then perhaps a child. The plan is now yours alone, and the old answer deserves a fresh look.

There are four basic designs: a family member or friend; a bank trust department or trust company; co-trustees who share the office; and a directed trust that separates investment from administration. This guide sets out what each does well and how the documents should handle fees, succession, removal, and conflicts, so that you can tell your attorney which design suits each trust and what the instrument must say.

What the office will ask of whoever holds it

A trusteeship is not an honorary title. The Office of the Comptroller of the Currency’s handbook on personal fiduciary activities lists the generally recognized duties: loyalty, administration at reasonable cost, protection of trust property, separate records, impartiality among beneficiaries, enforcing and defending claims, keeping beneficiaries informed, and prudent investment. Under the Uniform Trust Code’s default rules, in states that have adopted it, a trustee must also send beneficiaries currently eligible for distributions at least an annual report that includes the trustee’s own compensation.

Those duties last as long as the trust, which may outlive the first trustee you name. If you served as successor trustee of your husband’s trust, you know the texture of the work; our guide to successor trustee duties describes that first year in detail.

The family trustee: knowledge and loyalty, with limits

A son, daughter, sibling, or close friend knows the family, may charge little or nothing, and can respond quickly. For a modest trust with plain terms, that may be enough.

The limits are structural rather than personal. A child who is also a beneficiary must make decisions that affect her siblings. The Uniform Trust Code presumes a conflict when a trustee enters into a transaction involving trust property with her own spouse, descendants, siblings, parents or their spouses, or with a business in which she has an interest that might affect her judgment. An individual may lack investment or tax expertise; she can delegate where the document or the law allows, but must take reasonable care in choosing the agent, defining the assignment, and monitoring the results. And individuals age: under the Code, a vacancy arises if a guardian or conservator is appointed for a trustee.

The qualities you weighed in choosing your executor apply here too, stretched over years rather than months.

A bank or trust company: permanence under supervision

The OCC notes that state trust laws typically permit only a bank or a trust company to serve as a corporate trustee; investment advisers, broker-dealers, and insurers are not typically authorized. What a corporate trustee offers is continuity, specialist staff, and outside supervision.

Supervision depends on the charter. A national bank needs OCC approval, or in limited cases a notice, to exercise fiduciary powers; it must review each account before accepting it, review the assets of every discretionary account at least once each calendar year, and have its fiduciary activities audited. A state-chartered trust company answers primarily to its state regulator instead. In Texas, for example, the Department of Banking charters and examines trust companies under the Texas Trust Company Act and publishes a complaint procedure. Confirm the charter on the regulator’s website, not the firm’s.

Two limits deserve attention. OCC guidance says a bank must not accept assets beyond its staff’s expertise, and it singles out real estate, family businesses, oil and gas interests, foreign assets, and art for careful review. An institution may decline the asset that matters most to you. And the officer who presents the proposal is an employee, not a party to your trust; ask who will administer the account and what happens when that person leaves.

Do not confuse a regulated trustee with blanket insurance

A bank charter and fiduciary supervision do not insure the trust’s investment value. The FDIC covers qualifying deposit accounts at an insured bank, not stocks, bonds, mutual funds, annuities, or other nondeposit investments merely because a bank trustee holds them. Its trust-account rules also distinguish among ownership categories and certain deposits held by an insured bank in its capacity as trustee. Ask the candidate where idle cash is deposited, whose tax identification number and ownership category apply, whether balances are swept to other banks, and for a written coverage analysis. Verify any insured bank and its primary regulator independently; do not treat the firm’s marketing name as proof of charter, fiduciary authority, or deposit coverage.

Co-trustees: a family voice beside a professional one

The Uniform Trust Code’s commentary describes the classic pairing: a financial institution for its permanence and professional skills, and a family member to maintain a personal connection with the beneficiaries. It also cautions that co-trusteeship “should not be called for without careful reflection,” because responsibility blurs and an even number of trustees can deadlock.

Under the Code’s default rules, co-trustees who cannot agree unanimously may act by majority. Unless unavailable or properly excluded through delegation, each must participate in the trustee’s functions, and each must use reasonable care to prevent a co-trustee’s serious breach and to compel redress after a serious breach occurs. The commentary adds that co-trustees’ combined fees are often higher than a single trustee’s. If you choose this design, have the document allocate responsibilities and supply a tie-breaker.

Directed trusts: dividing investment from administration

A directed trust gives someone other than the trustee, called a trust director in the Uniform Directed Trust Act, a power over part of the administration, such as retaining or selling investments or managing a business held in trust. Liability follows the power. A trust director has the same fiduciary duty as a trustee in a like position, while a directed trustee that complies with a direction is liable only for its own willful misconduct and, unless the terms say otherwise, has no duty to monitor the director.

Suppose your trust will hold shares in a company your husband founded alongside a diversified portfolio. A director who knows the business could direct the shares while a trust company keeps records, files returns, holds custody, and makes distributions. The price is the loss of the institution’s independent second look at the director’s choices. The Act applies only where a state has enacted it, and states’ own directed-trust statutes vary, so the trust’s governing law matters. The Act’s commentary expects a directed trustee’s reasonable fee to be lower than an undirected trustee’s, though the directed trustee and the director together may cost more than a single trustee; ask for the directed-trustee rate in writing.

Trust protectors, succession, and the power to replace

The OCC describes a trust protector as someone other than the trustee, beneficiary, or grantor who holds power over part of a trust, which may include directing investments, removing or replacing the trustee, or amending the trust. It cautions that giving a protector the power both to dismiss the trustee and to name the replacement could concentrate authority in a way that defeats the purpose of separating the two roles.

Choose the trustee for the trust’s most difficult year, not its easiest.

Unless the document supplies its own procedure, removal under the Uniform Trust Code requires a court, which may act for reasons such as a serious breach, a lack of cooperation among co-trustees that substantially impairs administration, unfitness, or persistent failure to administer effectively. If no trustee remains, the Code fills the vacancy in a noncharitable trust in this order:

1. a person designated in the terms of the trust;
2. a person appointed by unanimous agreement of the qualified beneficiaries;
3. a person appointed by the court.

Name several successors, and consider a clause that allows a corporate trustee to be replaced by another bank or trust company without going to court; given the OCC’s caution, think carefully about who holds that power. The Code’s commentary warns that in an irrevocable trust, a settlor’s retained power to be appointed trustee, or to appoint someone who is not independent, risks inclusion in the settlor’s federal gross estate; settle that with tax counsel. Revisit these clauses whenever you review your estate plan.

Fee schedules and the conflicts behind them

Where fees are not set by law or the document, OCC rules allow a national bank a reasonable fee, and the Uniform Trust Code applies the same standard. Its commentary notes that institutions normally use published fee schedules, which courts have generally but not automatically upheld; termination fees are among the more litigated items and are less appropriate on a transfer to a successor trustee than when the trust ends. The OCC views tax-preparation and termination fees as appropriate supplemental fees if properly authorized, disclosed, and reasonable. Under the Code, a trustee must notify qualified beneficiaries in advance of any change in the method or rate of its compensation.

The subtler question is proprietary products. The OCC calls a trustee’s use of products sponsored by itself or an affiliate a conflict of interest, because the revenue may affect its judgment. Unless applicable law authorizes it, a national bank with investment discretion may not invest trust funds in the stock or obligations of the bank or its affiliates. Most state laws, the OCC notes, expressly permit proprietary mutual funds, and the Code does not presume a conflict when such an investment is otherwise prudent, but a trustee also paid by the fund for advisory or management services must disclose the rate and method of that pay at least annually.

Questions to ask a corporate trustee before you name it

1. Which regulator charters and examines your firm?
2. Will you accept every asset this trust will hold, including real estate, business interests, and art, and who will manage each?
3. Who will administer the account day to day, and what happens when that officer leaves?
4. May I have your published fee schedule, including minimums, supplemental fees, and any termination or transfer fee?
5. Will you serve as a directed trustee or beside an individual co-trustee, and at what rate?
6. Do you use affiliated funds in discretionary accounts, and are their fees offset against yours?
7. What will beneficiaries’ reports show, and how often?
8. How do you decide discretionary distributions, and how would you use a letter of wishes?
9. If the trust moves to another trustee, what will the transfer cost and how long will it take?

This article provides general U.S. educational information and is not legal, tax, investment, or fiduciary advice. Trust law varies by state and by document; confirm current rules with the relevant regulator and a qualified trust-and-estates attorney who knows your facts.