When it comes to investing your money, how do you know whom to trust?
That question has been on the minds of many after some high-profile deceptions hit the headlines recently. Trusting someone should never be the sole basis for asking them to be your trustee.
While it might be an honor to appoint a close friend, colleague or relative as your trustee, it can be a mistake to assign trustee services to someone who can’t read a trust agreement and doesn’t understand the trust laws.
Instead, you would be wise to hire a corporate trustee. Corporate trustees are typically found in the trust departments of banks or in trust-only banks. Hiring a corporate trustee means you will be working with a team of skilled professionals who have knowledge and depth in trust management. Not only can they read a trust document, they understand the state and federal tax regulations that relate to highly complex trusts.
Beyond that, the benefits of a corporate trustee are many:
Checks and balances: With a corporate trustee, decisions are never made by a single person. They work in committees, ensuring one individual can’t go out on his own and take a lot of risks. For example, a committee sets up investment policies and processes that would allow for the research of stocks and other potential investments. Each prospective investment would be thoroughly reviewed and evaluated to ensure it is in line with the client’s long-term objectives. It is essential to have strong internal controls, such as dual signature requirements and approval by one or two authorized individuals, depending on the dollar amount, before funds can be disbursed. Segregation of critical tasks to ensure no one individual can perform a task without another person’s approval or oversight also is essential. It’s also a good idea to have a board-appointed compliance officer who is responsible for ensuring all individuals are following required regulatory requirements.
Compliance, compliance, compliance: Corporate trustees are highly regulated in Michigan. The amount of regulatory oversight, by the State of Michigan, Department of Insurance and Financial Services or federal regulators, ensures compliance. Regular internal and external audits, typically done by an objective, outside firm, in combination with thoroughly documented policies and procedures, further enhance compliance.
Documentation: Strict regulatory requirements mandate documentation — reams of it. Corporate trustees are required to document every single decision made on an investment. Accounts have investment policies assigned to them that are audited on an annual basis. The policy document outlines what kinds of investments are acceptable, then the internal auditors or state examiners review that information to make sure all investments are in line with the policy.
No conflicts of interest: Hiring a corporate trustee means you will never have a conflict of interest — real or perceived. The trust guides all decisions, not the beneficiaries — and certainly not an individual making the decisions.
Always up to date: Because they are employed by banks or trust-only banks, corporate trustees keep apprised of the ever-changing industry. Regulatory changes, IRS changes and Michigan Trust Code changes come out frequently, which would make it difficult for an individual trustee to keep up to date; banks or trust-only banks receive updated information and training as members of the Michigan Bankers Association or the American Bankers Association.
Trust accounting systems: Corporate trustees rely on special trust accounting systems, which mandate very detailed records. You can keep separate reporting within an account for principal and income to accurately account for the separate beneficiaries’ entitlements as well as proper tax reporting. If a beneficiary called and said she wanted $1 million, a special trust accounting system would prevent any one person from dispersing that sum of money without many, many steps being taken to validate the request — and many people along the way signing off on it.
Confidentiality: Corporate trustees bide by strict rules of confidentiality. Unlike an individual, they can’t leave the office and talk about you, your account or your investments and how they are performing.
Immortality: Corporate trustees never die. Since corporate trustees work as a team, there’s always continuity even if one member of the team leaves or dies. The team concept promotes depth, allowing knowledgeable people to step in when someone is no longer available.
At the end of the day, these reasons all merge into perhaps the best reason of them all: Hiring a corporate trustee gives you the peace of mind that your investments will be directed as you choose — for the benefits of you, your family and generations to come.
Melanie VanderHoff is the senior vice president and senior operations manager of Legacy Trust, a trust-only bank in Grand Rapids that provides wealth management services to individuals, families, foundations and nonprofits. She can be reached at firstname.lastname@example.org.