It is probably not that difficult to decide whether you need a trust or not. However, for many of our clients, the major hurdle is finding the right trustee. There is no standard answer as the wishes of the settlor, family circumstances and asset picture or holding structure can all affect the choice of trustee. Although stating the obvious, the key is that the trustee must be someone you can trust.
What if there are no suitable candidates or if there are suitable individuals but you simply do not wish to burden them? Contrary to the widely regarded notion that loyalty cannot be bought, paying trustee fees and engaging a professional trustee (bank trustee or private trust company) may be the solution. A professional trustee will charge a set-up fee and annual fees to take on and administer the trust assets in the best interests of the beneficiaries. Typically, a professional trustee is conservative and careful because if it is sued by a beneficiary for breach of trust or mismanagement of trust assets, the negative publicity would be very bad for business.
There are pros and cons in choosing either an individual trustee or a professional trustee. It is ultimately a balancing exercise depending on the settlor’s needs.
Pros and cons of appointing an individual trustee
For many clients, having an individual trustee is attractive because one knows exactly who will be handling the trust assets and affairs. Understandably, it may be easier to trust a relative or a close friend as compared to a bank or private trust company because the trust is stemmed from actual bonding and close personal relationship. An individual trustee may also be someone who has been close to the family, knows the family circumstances and the settlor’s vision and needs. For example, if there are young or incapacitated beneficiaries, an individual trustee who is close to the family may have a better idea as to how to take care of such beneficiaries in accordance with the settlor’s wishes. Another benefit of having an individual trustee is that the remuneration arrangement can be more flexible (or even free of charge) whereas a professional trustee’s fee scale is pretty much fixed without much room for negotiation.
With that said, there are drawbacks in appointing an individual trustee. An individual trustee may not possess the requisite knowledge and experience to deal with complications that may arise. More importantly, since the settlor must pass the legal ownership to the trustee, appointing an individual trustee means that the trust assets will be tied to contingencies and personal circumstances of the individual trustee – for example, death, incapacity, divorce, bankruptcy and other creditor claims. If you decide you want an individual trustee regardless, you must make sure that the trust relationship is properly documented (so that the trust assets are segregated from the trustee’s personal assets and not subject to claims against the trustee). To spread the risk, it is advisable to have more than one individual trustee – in that case, the settlor must ensure he/she appoints individuals who are able to work together.
Pros and cons of appointing a professional trustee
A professional trustee (i.e. bank or private trust company) would not die, become incapacitated or get divorced. If most of the trust assets are funds in bank accounts managed and invested by the bank, it may be more convenient to set up a trust with that bank. Moreover, a professional trustee has more staff, resources and experience to manage the trust assets, in particular if the asset size is large or if the holding structure is complex.
A professional trustee is more likely preferred in one or more of the following circumstances:
- The trust is established for tax planning purposes and there are multiple jurisdictions involved.
- The asset holding structure is complicated and difficult for inexperienced individual trustees to manage.
- It is expected that the trust assets will be held for a long time, for example, there are very young beneficiaries or when it is intended that the trust would benefit multiple generations – having a professional trustee bypasses the risk of individual trustees dying or becoming mentally incapacitated or not healthy enough to manage trust affairs as they age.
- The settlor has many detailed instructions and conditions as to when and how a beneficiary should take benefit, which may be too burdensome for inexperienced individual trustees to handle.
- There is a risk of creditor or matrimonial claims and a strong desire to preserve assets.
- There is a risk of potential disputes between the beneficiaries, which individual trustees may not be able to handle – especially if the individual trustees are very close to the beneficiaries on a personal level.
However, a professional trustee does charge for their services. Understandably, some clients are concerned whether a professional trustee would know and carry out his/her wishes after his/her passing. Such concern may be alleviated by appointing a protector and having a more detailed letter of wishes to guide the trustee. The protector should be someone the settlor trusts to look out for the beneficiaries’ interests. Typically, the protector is able to change/remove the trustee, consent or veto the exercise of certain more important trustee discretions (or at least get notified) depending on the drafting of the trust deed. Although a letter of wishes is not binding, it is usually closely followed by a professional trustee. To ensure that the letter of wishes remains relevant, it is strongly advised for a settlor to conduct reviews regularly and when family circumstances change.
Another potential drawback of appointing a professional trustee is that depending on the policy of the bank or private trust company, a professional trustee may not be able to accept all types of assets into the trust. For example, some professional trustees do not accept landed properties in certain jurisdictions, and some do not accept shares in private companies. These would have to be dealt with via the settlor’s will.
Regardless of whether an individual trustee or a professional trustee is chosen, careful drafting or review of the trust deed by a qualified legal professional is crucial because the trust deed is what governs the trust relationship and sets out the trustee’s powers and obligations. If a professional trustee is chosen, many clients benefit from having a lawyer to liaise with the trustee and to draft the letter of wishes in accordance with the settlors’ wishes and guidelines.
We have experienced lawyers who have worked with both individual and professional trustees and can assist you with the process right from the start.
Our team at Hugill & Ip has extensive experience in dealing with Estate Planning and Trust issues – so if you need further advice on these subject, get in touch with us.
This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.