Trust Company of the South works with families to build, protect and preserve their wealth. Trusts are often the vehicles that help our family clients achieve these ends, given a trust’s ability to protect assets from creditors, to provide for heirs who need assistance with asset management, and to reduce taxes over time.
As a starting point, families should understand that a trust is a separate legal entity created by one individual (the grantor) in which another person or company (the trustee) holds, manages and distributes property contributed by the grantor to the trust. The trustee administers the trust in accordance with the terms of an agreement (the trust document) for the benefit of another person or persons (the beneficiaries). As part of Trust Company’s relationship with our clients, we have the ability to serve as trustee in our clients’ trusts.
When a client establishes a trust for the benefit of their family, the decision as to who should serve as trustee is crucial. A trustee’s core responsibilities are to oversee the investment of the trust’s assets and to safeguard them. Corporate trustees have complex systems of checks and balances, as well as insurance, to ensure the assets are preserved. Trustees are also tasked with managing distributions from the trust to the beneficiaries, while maintaining records to keep the beneficiaries informed about how the trust’s assets are invested and spent.
All of these duties involve skill, objectivity and good judgment.
From a management perspective, the trustee’s primary objective is to maintain the purchasing power of the principal for the duration of the trust term, so that the trust provides for the beneficiaries in accordance with the trust terms. While a trustee aims to generate positive returns on trust assets, its main focus is to prevent the assets from becoming less valuable over time, considering the impact of inflation, fees, taxes and distributions to beneficiaries.
The trustee must also manage the trust’s liquidity levels, in order to process distributions when the beneficiaries need them. If the trust holds unique assets or concentrated positions, the trustee should have the resources and experience needed to make complex decisions that account for risk, liquidity concerns, total return objectives and tax implications. All of these factors require the trustee to develop an investment plan for the trust that is monitored and adjusted over time and to ensure on an ongoing basis that the assets are invested in accordance with that plan.
Forging strong relationships among grantors, trustees, and beneficiaries
A trustee is often tasked with finding the delicate balance between serving the grantor’s vision for trust assets, while also helping beneficiaries meet their needs and pursue their goals. Achieving this balance requires open and clear communication, strong relationships, and trust.
From a distributions perspective, a trustee must interpret and prudently follow the trust document’s guidelines on when and how distributions should be made from the trust to the beneficiaries. Some distribution provisions are mandatory, such as a requirement that all net income be distributed to the beneficiary at least annually or perhaps that a beneficiary should receive 5% of the trust’s asset value annually.
But other distribution guidelines are discretionary and require the trustee to make a judgment about whether the beneficiary should receive funds from the trust. In order to make good decisions about distributions, the trustee must interpret the preferences of the grantor as described in the trust document, but must also spend time learning about current and future beneficiaries’ needs, desires and goals. For example, if a trust is to last for two generations, the current beneficiaries’ needs must be balanced with the requirement to have trust principal available for future (or, remainder) beneficiaries. Further, even if a distribution is allowable, the trustee must assess whether a distribution to a beneficiary is reasonable and appropriate, balancing the beneficiary’s request with the fact that the grantor has set the assets in trust in order to protect and maintain them for a period of time. All of these considerations should result in the trust producing positive, not negative, outcomes.
In order to assure beneficiaries that the trustee is acting in their best interests, the trustee has a duty to account to the beneficiary on the activities of the trust. The trustee will be responsible for keeping accurate records of the “ins” and “outs” of the trust and sharing that information periodically with the beneficiaries. The trustee will also be responsible for filing the appropriate tax returns and providing tax information on a timely basis to the beneficiaries.
How would Trust Company of the South approach these key duties as trustee?
Our first goal would be to get involved in the earliest phases of planning, working with grantor clients and their attorneys on trust design. This guidance can help grantors avoid vague or conflicting language in the trust document and can also set reasonable expectations on how the trust should and will be administered.
Even still, we recognize that no matter how well a trust is drafted, it will be challenging for the grantor to lay out a trust administration scheme that will be successful for multiple generations and that will provide necessary context around why the trust was established. Ideally, the grantor involves family during the trust planning process and may include family or dependable individual advisors in the trust, holding roles, such as trust protector, to ensure the trust’s operations adapt with the family’s evolving needs over generations. Trust Company of the South serves our clients in these advisory capacities as well. We encourage the beneficiaries to see the trust in a broader, multi-generational context rather than solely as a way to advance their own interests, which we know increases the chances of the long-term success of generational wealth planning.
Once a trust is established and being administered by us as trustee, we collaborate on an ongoing basis with our beneficiary clients to educate them on the grantor’s vision for the trust, to ensure we have an appreciation for their needs and goals, and to again set expectations for how the trust will be administered based on its terms, applicable law and our internal procedures. A strong and transparent relationship between the trustee and beneficiaries—combined with experienced, prudent and mindful decision-making by the trustee on investments and discretionary distributions—are the keys to producing desirable long-term outcomes.
This communication is for informational purposes only and should not be used for any other purpose, as it does not constitute a recommendation or solicitation of the purchase or sale of any security or of any investment services. Some information referenced in this memo is generated by independent, third parties that are believed but not guaranteed to be reliable. Opinions expressed herein are subject to change without notice. These materials are not intended to be tax or legal advice, and readers are encouraged to consult with their own legal, tax, and investment advisors before implementing any financial strategy.
