As a financial advisor, you ask your clients if they have up-to-date estate plans and you may assist with drafting them. But would you be prepared if a client serving as a co-trustee or trustee to a complex, multi-million estate sought your advice? Or if a client asked you to take on the role of trustee?
And if estate planning isn’t your forte, can you confidently work with other professionals who are part of your client’s team by weighing in on the financial planning considerations that are important to creating and executing a solid estate plan?
If you haven’t given this much thought or don’t have expertise in estate planning and trusts, this may motivate you: the $84 trillion intergenerational wealth transfer. More advisors will be called upon to provide estate-planning insight for their clients, especially because the number of corporate trustees that would have traditionally provided such services is shrinking.
About 80% of trusts are now managed by individual trustees, including family members and financial advisors, and only 20% are managed by corporate trustees, says estate-planning attorney William C. (Bill) Waller Jr. When he started in the business 40-plus years ago, nearly all trustees were corporate trustees, he notes.
This sea change “gives the financial advisor, who usually has a longtime, ongoing relationship with the family, a real opportunity to help the family structure that trust and, perhaps as importantly, help them identify and pick the individual trustee,” says Denver-based Waller, a retired law firm partner who has handled many high-profile cases.
Working with — or as — the trustee or co-trustee also decreases the likelihood of those assets walking out your door upon the death of the grantor, settlor or trustor [interchangeable terms], he notes.
The most common fee structure, if you’re managing the assets, is a percentage of assets under management. If that doesn’t cover the particular trust-related services you provide, you can bill on an hourly basis.
A Good Fit …
Financial advisors are a natural choice to serve as trustees, say Waller and Dennis Channer, co-founders and principals of The Private Trust Consortium, a membership organization dedicated exclusively to providing trustees with education and tools to successfully manage trusts. They’ve seen more advisors step into this role.
“It’s not unusual — in fact, it’s very typical — that a client who has the rapport with their registered investment advisor about their money ends up asking the RIA to be the trustee,” says Channer, CPA, CFP, AEP, also a managing principal at Denver-based Cornerstone Investment Advisors.
Channer has had financial planning and wealth management clients ask if they could include him as a trustee or executor in their estate-planning documents.
… But Know What You’re Jumping Into
Becoming a trustee (or co-trustee) is not an easy role, especially for a financial advisor. “An RIA serving as the trustee is a unique situation, very different than a family member serving, or a trust company or an attorney or a CPA,” says Channer. That’s because “there are some relatively onerous rules and guidelines and restrictions that an RIA needs to follow to serve as a trustee.”
First, an SEC-registered investment advisor serving as a trustee, or co-trustee, for clients is considered to have custody of these assets, says Channer. “This creates a conflict of interest since the advisor is often compensated for managing the trust assets, as well as having access and control of the assets.”
The SEC also requires RIAs to do special filings and more extensive reporting, and to agree to and pay for an annual surprise audit by a public accounting firm that’s qualified by the Public Company Accounting Oversight Board (PCAOB). This audit focuses on the responsibilities of maintaining custody.
“These are not insignificant requirements,” Channer says.
Communication is Key
Financial advisors who are up to the challenge of being a trustee, or more involved in the trust process, can be a good fit since they are well versed in tackling challenges that corporate trustees and other professionals may find too messy or complicated, say Channer and Waller.
“When you get blended families and you have difficult family situations, when you get trusts that have operating businesses or unique assets like oil and gas and mineral interests, or things that are not necessarily just investable assets, the corporate trustees are shying away from those types of trusts,” says Waller. The same with special-needs trusts, he adds.
Financial advisors “know how to talk to people. They know how to listen and understand where people’s concerns are coming from,” says Waller. “And if they’ve been involved with the family for a long time, they’re usually in a position to explain why the trust is structured that way — what mom or dad or the family’s purposes were.”
In contrast, an accountant and a lawyer may not be “as involved on an ongoing basis, and their perspective may be a little different,” says Channer, who worked for many years as a CPA. “They’re not necessarily collaborators, as maybe an investment advisor is, or a financial planner.”
Stress-busting
Since financial advisors often have more of a relationship with the client, “they’re in the better position, I think, to help the family interpret the situation in a nonthreatening way,” adds Channer. He also suggests meeting with or speaking with family members individually regarding the trust and estate, rather than putting them in the position of having to ask questions in front of the group.
“It takes some of the sting out of it, or the stress out of it, because this information typically is very new to them, and it can be kind of intimidating,” he says. This can be especially true if some of the adult children are self-sufficient, capable individuals and others “are absolutely not,” says Channer. “They’re struggling in life and maybe have been struggling for a long time. And it may go beyond financial issues — lifestyle issues and so on.”
Think Like a Psychologist, Tax Specialist and Lawyer
Families and trusts can be a train wreck without proper communication and provisions. “I spent most of my career suing trustees, representing families who were either fighting with each other over money or fighting the IRS to keep their money,” Waller says. “I got a lot of practical experience in what can go wrong with a trust and where a lot of mistakes are made.”
Advisors who serve as trustees, or assist trustees, need to understand their obligations and duties; make sure they’re properly doing the accounting and report preparation; and have insurance that protects them and the trust, should they make a mistake, he says.
Advisors should also be thinking about “helping families put together planning that won’t wind up in court or in litigation,” says Waller.
Familiarizing yourself with the many moving parts of trust-and-estate work, and being able to explain this in layman’s terms — even if you don’t take on the role of trustee — can also help you add value to your client relationships.
Getting Everyone on the Same Page
Financial advisor Matt Hess, CFP, of Berman McAleer, an independent financial planning and wealth management firm with offices in greater Baltimore and New York City, has assisted clients who’ve been appointed as trustees.
Helping trustees gain a deeper understanding of the family dynamics can be as important as “carrying out the wishes of the deceased while ensuring the appropriate legal/investment structure,” he says. “When a large estate is left behind, there is high pressure on the trustees as fiduciary to act in the best interest of the beneficiaries.”
Using presentations and proposals, his team has helped trustees and beneficiaries understand “here’s where we are today and here’s where we need to go, based on what this trust document lays out,” says Hess. “That requires us to really dig deep on the estate-planning side, and then also in the trust document itself. We have to know that thing like the back of our hand to be able to interpret that appropriately.”
A Multifaceted Approach
In addition to facilitating trustee administration discussions and meetings, Hess’s team has managed annual unitrust distribution income [a percentage of trust assets] for beneficiaries, consolidated investment assets at fewer custodians to simplify trust administration, and created sub-trusts to fulfill generation-skipping transfer tax (GSTT) exemption planning.
Hess’s team has asked trustees if they want to pick and choose how to divide investment assets held in trust, and also has given its opinion based on tax implications and other factors. In one situation, “we ended up doing it in a pro rata version — basically splitting it down the middle for who got what — because that was a way to protect the trustees.”
In general, he and his colleague have focused a lot on “how do we protect the trustees from the decision-making [powers] that they had,” he says, “so there’s no questions raised in the future that we cannot have documented and also have a defense behind.”
Sometimes “there are many headaches along the way for the trustees and us alike,” says Hess. “But the relief we’ve been able to create in the trustees as clients and trust fiduciaries has been a great experience for all parties.” Getting to know family members through trust work has also landed the firm wealth management clients.
Unexpected Circumstances
Many people think that once an irrevocable trust is enacted, it’s untouchable, “but that’s not the way it is today,” says Waller. Some of the provisions in a trust can be modified to the situation, but still meet the grantor’s wishers, “if beneficiaries are in agreement and circumstances have changed.”
The Uniform Trust Code was put in place to make it easier for trustees, grantors and beneficiaries to modify irrevocable trusts. That’s “because tax laws are always changing, parties are always moving, the nature of the assets change,” Waller says. For example, a trust could sell an asset subject to high taxation and reinvest the money into an asset with little or no taxation, he says. “The financial advisor is at the table when all that is being done,” as a member of the team, or as a trustee.
Trusts can also be modified when a beneficiary dies or when a bona fide dispute comes up, says Waller. He recalls a dispute that arose between a settlor’s widow (the decedent’s third wife) and the settlor’s children from his first marriage, who did not feel the trust was set up fairly.
“We were in litigation for about a year when the attorneys, the accountants and the financial advisors were able to sit down with both sides and show them that by restructuring the estate plan and having the court approve it, we could save so much in taxes that we could almost pay for the cost of the settlement,” says Waller. “In other words, it was a win-win for everybody.”
Keeping the Business Going
Channer, who has been involved in a number of farm and ranch trusts, says it’s important for settlors to create trusts what will keep their business going, if that if their goal.
Ranches typically don’t generate as large a return on investment as other kinds of assets, so family members not involved in the operation [or in other types of businesses] may push for a sale, he says. In situations like this, a financial advisor can help the settlor create a trust structure or help the settlor select individual trustees who can communicate well.
“If the beneficiaries understand that this was something that was thought through, and it’s the way the settlor wanted it, that could eliminate a lot of family friction,” says Channer.
Years ago, he represented the largest shareholder of a large publicly traded financial institution. The shareholder wanted his trust to maintain enough company stock to give his family a controlling interest on the board, but the corporate trustees were hesitant to keep that much stock in the trust because there wasn’t enough diversification, says Channer.
“We were able to do a complicated prepaid variable forward sale, which enabled the trust to generate some significant cash, which could then be invested in a more diversified portfolio,” he says, “while at the same time maintaining control over the stock in the financial institution.”
Happiness Counts, Too
Karen Altfest, CFP, PhD, a principal advisor with Altfest Personal Wealth Management in New York City, currently serves as the executrix of two estates, and is a trustee on one of them. She had been the power of attorney for one of these long-time clients for years “because she was all alone; it was really sad,” Altfest says. Being involved isn’t difficult for Altfest. “I do have the estate attorney, I just follow everything in the will, and that’s it,” she says.
In another situation, someone called Altfest to ask for furniture that was part of an estate and she had to tell the caller that they were not a beneficiary in the decedent’s will. “You don’t want somebody’s relatives fighting over something under your watch,” she says.
Altfest has also observed the emotional burden that a trust can have on a beneficiary. “One woman inherited a large art collection by a not very well-known artist, and she has changed her whole life to taking care of this. She seems very burdened by it,” says Altfest. So, it’s important that trustors and trustees have those conversations with family members and other heirs ahead of time so there are no big surprises or albatrosses awaiting them.
Coming to the Table
Reaching out to the next generation may not be as difficult as you anticipate if you are part of a family’s trust team, in any capacity.
“The trust-makers and the people that develop the wealth, they want to make sure that their sons, daughters, extended family — the people that would benefit from that trust — are introduced to you,” says Channer. “Obviously you encourage that, but I’ve never really had to work at it.”
“I can’t think of a situation where I’ve said to Mr. and Mrs. Trust, ‘We need to really talk to the kid’ — usually it’s just part of the conversation you have with them,” he says. “You’re involved in those discussions all the time, and so they bring those people to the table more than I’ve asked them to come to the table.”
Jerilyn Klein is editorial director of Rethinking65.
