As the financial services industry continues to grow more complex with increasing numbers of new business models, a surprising new niche has opened, allowing traditional rivals-financial advisors and trust companies-to work together. With the help of new state trust laws, which redefine the trustee's role, advisors and trust companies can present high-net-worth clients with a powerful team to help them meet their financial objectives.
The Traditional Trust
Under the law of most states (state law is the source of most law governing the allowable terms of trusts), a trust has three parties: the grantor or settlor; the beneficiaries, who would receive the trust's income and principal; and the trustee who must safe-keep the trust's assets and decide how to distribute the proceeds to the beneficiaries. The rights and responsibilities of all of these parties are established by the trust instrument, and are within the rules set by state law.
In this traditional model, the trustee not only negotiates the rights to the trust's proceeds with beneficiaries, but they must also manage the assets and oversee a laundry list of responsibilities which also includes arranging for custody of securities; dealing with personal and real property owned by the trust; and, in some states, regularly filing trust accountings with a public authority.
While the trustee can hire service providers to perform these various functions, the trustee is liable to the trust for any mistake made by the vendor, regardless of the depth of due diligence the trustee used to select the firm. Because of this standard of liability, trust companies historically handled all trustee functions-including asset management-internally.
The Modern-Day Trust
Today, several states, led by Delaware, have decided that this inflexible model of trust and estate planning ignores the needs of grantors and the specialization that has emerged in the financial services marketplace. In these states (which also includes South Dakota, Arkansas, Nevada, Wyoming and New Hampshire), trusts still have a trustee. However, they allow the traditional trustee role to be unbundled and a trustee's function to be distributed among several designated individuals for one trust.
For example, in these states, a trust instrument may name an administrative trustee responsible for safekeeping and accounting for trust assets. Another trustee can be responsible for directing the investment of trust assets while another trustee could be responsible for deciding how trust assets will be distributed to beneficiaries. Yet another trustee can have the authority to amend the trust to ensure that it maintains a structure. All of these trustee functions can be fulfilled with committees.
In addition to allowing the slicing and dicing of trustee responsibilities, all of these jurisdictions also permit very flexible trust investment management strategies.
The key statutory element that makes this team approach work is that the terms of the trust may provide that none of these trustees are liable for any of the actions of another trustee.
What this means is that an advisor's long-time client can create a trust with a trust company, which would administer their assets, and at the same time name that trusted advisor in the trust as the "direction" trustee who can direct how the trust assets are invested.
The New Reality
Despite this potential change in trust administration, the reality is that many traditional trust companies are still unwilling to accept an appointment as a trustee when the responsibilities have been unbundled. This reluctance stems from a gamut of concerns, which include: not having a location in a modern trust jurisdiction; and being uncomfortable operating with a new business model, which presents risks that they do not understand or are unwilling to accept.
Several trust companies, including New York Private Trust Company (NYPTC), have adopted the modern trust model. The firm has even opened a Delaware office to design programs to serve the directed trustee market. In fact, a few firms, such as NYPTC, have designed programs aimed at advisors, multi-family offices, accounting firms and law firms offering administrative trust services uniquely branded for their clients. This type of relationship transforms traditional competitors into true teammates.
The birth of advisor-friendly institutional trustees has revolutionary implications for an advisor's business development efforts.
If the advisor is advising an existing trust with an individual trustee and the client would be better served by an institutional trustee, the advisor can send the client to an advisor-friendly trustee without fear that they will lose the management of the trust's assets. Similarly, if a client's lawyer, accountant or financial planner recommends that the client form a trust with an institutional trustee to handle assets currently managed by the advisor, that advisor can participate in the conversation and recommend advisor- friendly trustees with lower fees and the opportunity to preserve a pre-established asset management plan.
The directed trust relationship allows the advisor to remain as the quarterback of the client's financial affairs, while leading them to a valuable service provider.
If trusts are currently a part of your client offerings, or should be, look for an advisor- friendly trust company with the capability and willingness to accept a trust appointment that uses direction trustees and start a conversation. My prediction is that you will like what you hear.
Matthew J. Lynch, is a Managing Director for New York
Private Trust Company. Click here to send him an e-mail.