Trust Companies serve as an alternative to an individual trustee. Rather than name a family member or trusted individual to act as the trustee, some grantors choose to employ the services of a trust company. In some instances, this decision is made out of a simple desire to relieve love-ones of the burdens that come with trust administration. In other cases, trust companies are chosen specifically based upon the relative advantages they provide given their state of domicile.
Which trust company you choose to manage your wealth should be a decision that reflects your priorities and objectives. Here we assess the comparative advantages of different options.
Start with the state
The ‘Trust-Worthy’ Seven
There are seven U.S. states which are widely regarded to have the most favorable laws governing trusts. These are (in alphabetical order):
- New Hampshire
- South Dakota
Of these seven, Nevada and South Dakota are considered to provide the most advantages.
Nevada and South Dakota offer the most favorable terms regarding some of the most common considerations. These are:
- No state income taxes.
- Extended (or limitless) trust expiration dates which allow for multigenerational support.
- Allow for directed or delegated trusts. Delegated trusts allow advisors, estate attorneys, or other appointed professionals to exert greater control over distributions, outsourcing, and investment management. Directed trusts offer the same authority plus the legal ability to change trustees.
- Strong asset protection laws which limit creditors’ lookback period.
- Flexible decanting rules which allow for an outdated trust to be dissolved and assets to be transferred into another trust with updated provisions.
- Privacy laws that make any court changes sealed.
Decanting lets trustees change certain terms of the trust by figuratively pouring the assets of an old trust into a new one.
Choosing Your Team
Traditional Bank Trust Company
A traditional bank trust company can provide an all-in-one service offering which handles both trust administration and trust asset management. Though this may offer simplicity it often comes at a cost. Most of the larger banks that offer trusts also own proprietary mutual funds. This results in a potential bias towards investing trust assets in their own expensive, actively managed funds to maximize their fee revenue.
In select instances, a traditional bank trust company may be most appropriate. For example, if the trust will be funded primarily with “hard” assets such as residential or business properties, vehicles, fine art or collectibles that don’t require ongoing investment management, or if all assets in the trust are expected to be fully distributed to beneficiaries or charities within a relatively short timeframe, not making it worth your time to set up a directed or delegated trust.
Trust Administrator + Asset Manager
A hybrid model which employs a trust administration entity with an asset management entity may be the most suitable model for those seeking greater flexibility in their investment options as well as the mitigation of potential conflicts of interests relating to fund selection.
In this framework, the trust administrator focuses mainly on trust administration. They don’t manage assets held in the trust, although as the corporate trustee, they have a fiduciary responsibility to make sure trust assets are managed and safeguarded prudently and responsibly (unless the trust is directed). The asset manager or financial advisor typically serves as the intermediary between beneficiaries and the corporate trustee.