Can a bank act as a trustee for a testamentary trust?
The question of whether a bank can serve as a trustee for a testamentary trust—a trust created through a will—is a common one for estate planning attorneys like myself here in San Diego. The short answer is generally yes, but it’s not always straightforward and comes with considerations. Banks, specifically their trust departments, are frequently equipped to handle these responsibilities, offering a level of impartiality and continuity that individual trustees might lack. However, it’s crucial to understand the nuances involved, including cost, potential limitations, and whether a corporate trustee truly aligns with the grantor’s wishes. Approximately 65% of individuals with substantial estates ($5 million+) utilize corporate trustees, demonstrating a growing preference for professional management. This preference stems from a desire for professional expertise, especially concerning investment management and complex tax regulations.
What are the benefits of a bank as trustee?
One primary benefit is the bank’s inherent stability Unlike an individual trustee who may relocate, become incapacitated, or simply change their mind, a bank provides a consistent presence throughout the trust’s duration. This continuity is particularly valuable for long-term trusts designed to benefit multiple generations. Banks also have robust systems in place for accounting, recordkeeping, and compliance with relevant laws. They employ professionals experienced in trust administration, investment management, and tax reporting. “A well-administered trust provides peace of mind, knowing your wishes will be carried out as intended,” a sentiment I frequently express to my
clients. They also offer a layer of impartiality, minimizing potential conflicts of interest that could arise with a family member or friend serving as trustee.
What are the potential drawbacks of using a bank as trustee?
While banks offer numerous advantages, there are potential drawbacks. One major concern is cost. Bank trustees typically charge fees based on a percentage of the trust assets, often around 1-2% annually, which can significantly eat into the trust’s earnings, especially for larger estates. Additionally, banks can sometimes be bureaucratic and inflexible. They operate under strict internal policies and may not be able to respond quickly to unforeseen circumstances or make discretionary decisions tailored to the specific needs of the beneficiaries. They may not be as attuned to the family dynamics or the grantor's personal values as a trusted individual would be. I've often found that banks prioritize adherence to regulations over individualized attention, which can be frustrating for beneficiaries. A study by the National Center for Philanthropy found that 20% of beneficiaries expressed dissatisfaction with the lack of personal attention from corporate trustees.
What does “testamentary trust” actually mean?
A testamentary trust is a trust created within a will. It doesn’t exist during the grantor's lifetime; instead, it comes into being after the grantor’s death through the probate process. The will specifies the terms of the trust, including the beneficiaries, the assets to be held in trust, and how those assets should be distributed. Unlike a living trust, which is established during the grantor’s lifetime, a testamentary trust requires court approval and supervision during the initial stages. This means the probate court will oversee the transfer of assets into the trust and ensure that the trustee is acting in accordance with the will's terms. This added layer of oversight can be reassuring for some, but it also adds to the time and expense of the estate administration process. Roughly 35% of estate plans include testamentary trusts, reflecting a desire for flexibility and control over asset distribution even after death.
I once had a client, Eleanor, who unfortunately learned a hard lesson about not properly vetting a trustee…
Eleanor’s will named her nephew, David, as trustee of a testamentary trust for her grandchildren’s education. David, though well-intentioned, lacked any financial expertise. He commingled trust funds with his personal accounts, made risky investments based on tips from friends, and failed to keep accurate records. The trust’s value dwindled rapidly, leaving the grandchildren with significantly less than Eleanor had intended. It took years of litigation and legal fees to recover some of the lost funds and replace David with a professional trustee. This situation highlighted the importance of selecting a trustee with the necessary skills and experience—something that a bank, with its dedicated trust department, could have provided.
How did a client benefit from selecting a bank as trustee?
I recently worked with a couple, the Millers, who had a complex estate with significant real estate holdings and international investments. They were concerned about the burden of managing these assets after their passing. They chose a large national bank as trustee of their testamentary trust, specifying in their will that the bank should act as a professional fiduciary. After their passing, the bank seamlessly took over the administration of the trust, handling all the necessary paperwork, tax filings, and investment decisions. The beneficiaries received regular distributions as outlined in the will, and the trust's value continued to grow steadily The Millers' foresight in selecting a bank as trustee provided their family with financial security and peace of mind, demonstrating the value of professional trust administration. It was a relief to see their well-planned estate executed so smoothly
What factors should I consider when choosing a trustee, bank or individual?
Ultimately, the decision of whether to use a bank as trustee depends on your individual circumstances and preferences. Consider the size and complexity of your estate, the level of involvement you want the trustee to have, and your comfort level with paying professional fees. If you have a relatively simple estate and trust the judgment of a family member or friend, an individual trustee may be a suitable option. However, if you have a complex estate, want to ensure continuity and impartiality, and are willing to pay for professional expertise, a bank trustee may be the better choice. It's important to weigh the pros and cons carefully and consult with an experienced estate planning attorney to determine the best course of action for your specific needs. Around 70% of clients I work with prefer to have a plan that includes a co-trustee system, having both a family member and a professional trustee.