One of the most crucial questions our estate planning client’s face is this: Who should they designate to step-in and manage their financial affairs if they no longer want to, or are no longer able to, continue to do it themselves?

In my experience, most people don’t give much thought to this question, even though they will be trusting this person with their life savings and financial security.  People typically choose a family member, perhaps the oldest child or the one with whom they feel closest. This person may or may not be the best choice. They may not have the time and ability to effectively deal with the burdens of managing another person’s financial life.

Another option for many people is to hire a professional company to manage their finances if and when the appropriate time arrives. There are trust companies in most communities that specialize in this kind of work.

Many people who could benefit from the services of a trust company never even consider this option. They may think, incorrectly, that you need to be a millionaire to set up a professionally managed trust. But this is not the case.

In this article I hope to address some misunderstandings clients often have about trust company services. I want to discuss some of the considerations that clients should weigh as they try to answer the question: who should I choose as my financial surrogate – a family member or a trust company. It is written from the perspective of an elder law attorney who is not an employee of a trust company.

What is a Trust Company?

When I use the term “trust company” in this article I mean a corporation that is authorized to handle assets for the benefit of others. My use of the term includes trust departments which are associated with commercial banks. Although trust companies are often affiliated with commercial banks the trust company and bank have different functions. A trust company does not own the assets it administers for its clients. It serves as custodian of and provides investment and financial management services for funds that remain owned by the person setting up the trust or agency or by the trust beneficiaries.  This means that customer’s trust funds are not subject to the creditors of the trust company or any associated bank. It also means that trust companies do not have commercial banking powers and are not insured by the FDIC.

Some trust companies operate in only one state while others are national. Trust companies vary greatly in terms of the size of accounts they require and the fees they charge. So, it is important for consumers and their advisors to shop carefully to find a trust company that makes a good fit with the consumer’s particular circumstances and needs.

Powers of Attorney and Trusts

Two primary methods of authorizing another person to manage your financial matters are the power of attorney and the trust.

In my experience, most people who choose to name a family member as their financial surrogate use the power of attorney approach. With a power of attorney one person (the “principal”) gives another person (the “agent”) the authority to make decisions for and manage the financial and other assets of the principal to the extent authorized in the document. With a power of attorney, the legal title to assets remains with the principal.

On the other hand, the common way to authorize a trust company to act as financial surrogate for a consumer is through creation of a revocable trust.  The person setting up the trust (the “settlor”) signs a trust agreement which gives the settlor’s directions for the trust. With the assistance of the trust company any assets the settlor wants managed are then re-titled in the name of the trust.  The trustee then administers the trust assets in accordance with the directions of the settlor. Everything is revocable, which means the trust can be modified and even cancelled by the settlor in the future.

These are the typical arrangements. However, a family member may serve as trustee, and a trust company can act as an agent under power of attorney.

Agents and Trustees as Fiduciaries

Agents and trustees are normally going to be consider to be “fiduciaries” which means they owe a high duty of loyalty, responsibility, and prudence towards the other parties to the relationship. Fiduciary duties are typically not stated in the trust or power of attorney document but are specified by statutes and court decisions. Trustees and agents may be required to account for their actions and can be held financially liable for any violations of their fiduciary duties.

Trust companies are usually highly aware of their fiduciary duties, but family members serving under power of attorney are not. In Pennsylvania, specific fiduciary responsibilities placed on persons serving as financial power of attorney (“agents”) are set out by statute in 20 Pa. C.S.A. §5601.3. Family members who serve as agents should become familiar with those requirements.

Family Member or Trust Company – Weighing the Advantages

If you someday want or need help with financial matters like bill paying and investing, should you hand the responsibility over to a family member? Or should you choose a trust company to serve this role? You should give this decision some serious thought. The choice you make may be crucial to your future financial security and perhaps to the well-being of your family. A seasoned elder law attorney can draw on years of real-life experience to help guide clients in making this crucial decision.

There are some advantages of choosing a family member as financial surrogate and some of using a trust company. The remainder of Part 1 of this article will discuss some of the possible advantages of each approach. Part 2 below provides the results of a survey I conducted which shows the costs of retaining the services of a professional trustee.

Discussion of Possible Advantages of Choosing a Family Member as your Financial Surrogate

1. No Financial Threshold. A family member will serve if you have very limited assets. Even if you are living month to month with no savings, a family member can step in to manage your checking account and pay your bills, taxes, and insurance premiums, and sign contracts for services you need. If you have no savings a trust company will be unlikely to accept you as a client. Trust companies typically charge for their services based on a percentage of the funds being managed, with a minimum annual fee. If you have no funds to manage you will still have to pay the minimum fee. Percentage rates and minimum fees vary widely among trust companies. You need to shop around. Smaller trust companies are likely to have the lowest minimum fees and percentage rates. There are small trust companies who charge a minimum annual fee of $1,000 or less. See Part 2 of this article for the results of a survey I conducted in early 2020 of 4 small bank- based trust departments in the Williamsport Pennsylvania area. The survey shows the annual fee that would be charged on a trust with $100,000 under management. The annual charges range from $800 to $1,500. This makes a small trust company a viable financial management option for individuals and couples with as little as $100,000 to manage. But for individuals who truly have no retirement funds or other savings a family member may be the only option.
2. Initial Simplicity. Although some trust companies are willing to serve as agents under power of attorney, most prefer that their clients create and fund a trust. Family members are generally more willing to serve as agents which requires no re-titling of assets. (Re-titling means changing the legal title on assets from you individually to your trust). Because re-titling is not involved with a plan based on a power of attorney, it may be simpler to implement, at least initially.  And no separate income tax returns will be required. However, third parties (e.g., stock brokers and banks) are less likely to readily accept the authority of a family member acting under power of attorney than of a trust company especially where a trust has been funded. So, the simplicity advantage of the family member-power of attorney approach may be short-lived.
3. Family Members may Decline to Charge for their Services. Although generally entitled to a fee, a family member who serves as your agent or trustee may decide not to charge for their services. A trust company will charge. But, see the further discussion of fees below under the topic “Experience.”
4. Desire to have Family Members involved in certain Financial Decisions. The “principal” creating a power of attorney or the “settlor” creating a trust may want to have a family member in charge of some types of financially related decisions. For example, the principal/settlor may want a family member to review and sign contracts for services (e.g., home health aides), or to make decisions regarding gifts to children and grandchildren. However, the family member can be given this authority as part of a trust company-based plan. A trust company can handle the investments and pay the bills while the family member makes the more personal financial decisions. The family member and trust company can be named as co-trustees. Or, a family member can serve as agent under power of attorney while the professional trustee handles most of the investment and bill payment duties.

Discussion of Possible Advantages of Choosing a Trust Company as your Financial Surrogate

1. Experience. If you need heart surgery you are probably better off seeing a doctor who has performed heart surgery hundreds of times before rather than never. It is similar with managing financial matters like investing. Experience helps. A lot. It increases the likelihood that you will get higher investment returns with more safety. This experience factor may offset the perceived cost advantage of choosing a family member who doesn’t charge for services. For example, you are going to be better off with a trust company that earns you a 4% return and charges a 1% fee (3% net return) than with an inexperienced family member who earns only 1% and does not charge a fee (1% net return).
2. Prudence. Consistent with your goals and directions, a trust company is more likely to try to provide you with a diversified, safe investment portfolio. An inexperienced family member is more likely to choose investments that are either too conservative or too speculative. A trust company’s emphasis on prudence may help protect you from the poor investment returns or even losses that may be incurred by a well-meaning but inexperienced family member.
3. Oversight. In addition to having fiduciary responsibilities, trust companies are subject to government regulatory oversight and audit similar to that imposed on banks. This scrutiny provides you with an extra measure of protection against improper actions.
4. Stability. Your family member may get sick or die. A trust company will survive the illness or death of any individual. Even if its related bank goes out of business, your trust assets are separate and protected from any bank failure. Your trust will continue.
5. Conflict Avoidance. A family member who is serving as your agent may be a potential beneficiary of gifts and other financial rewards from you during lifetime or at your death. Decisions made and actions taken by your family member-agent may involve conflicts of interest. Even if the agent tries hard to be fair and impartial, other family members may perceive differently. This can create suspicion and emotional strain in your family. These concerns can be limited or avoided by having a trust company serve as financial surrogate.
6. Systems. A trust company is going to have systems already in place to ensure that taxes and other bills get paid and other actions are taken in a timely manner. A family member may have to create such systems from scratch and is more likely to make mistakes, like failing to make timely payment of a bill.
7. Reporting. A trust company will provide you with a regular written accounting of all of the actions it takes on your behalf including all investments and payments. Such reporting is unlikely if a family member is administering your finances.
8. Burden Avoidance. Acting as someone’s financial manager is difficult and time- consuming. A trust company can relieve family members from these burdens.
9. Impartiality. A trust company can serve as a financially and emotionally neutral third party. It can help limit and resolve family disputes and avoid discord.
10. Confidentiality. A trust company will provide confidentiality for your financial information unless you direct otherwise. Maintaining confidentiality is much more difficult when a family member is handling your finances.
11. Avoiding Legal Jeopardy for your Family Member. There is a constant flow of cases in the courts involving family members being sued civilly and even criminally for their actions as dad or mom’s agent under powers of attorney. Cases are brought by other family members and by governmental entities. A family member who has failed to keep detailed records of all actions, or made mistakes out of ignorance can be in very real legal jeopardy.
12. Better Acceptance. Family members who are serving as agents often run into problems having a power of attorney accepted by a bank, brokerage, or other third party. Acceptance of your financial surrogate’s authority is typically improved if the surrogate is a trust company. This allows your transactions to take place more quickly and smoothly. 

Who should you Choose as your Financial Pinch-Hitter: A Family Member or a Trust Company?

As discussed above, there are numerous potential advantages to having a trust company serve as your financial pinch-hitter. An experienced local trust officer can become your financial care manager. On the other hand, there may be advantages to having a family member involved.

It doesn’t need to be a binary choice. The best solution in some cases may be to have investment, bill-payment and record-keeping managed by a trust company while a family member serves as power of attorney for certain other matters.

The unfortunate reality is that most seniors are “in the dark” about trust company services. Even those who are aware of this option often assume that they don’t have enough assets to justify hiring a trust company. Or that the costs are prohibitive. But as Part 2 of this article will show, professional trust services may make sense even for individuals and families with relatively modest savings. It makes sense to explore your options before making the crucial decision of choosing your financial pinch-hitter.  The best solution for you will depend upon your unique circumstances and comfort levels.

Smaller Bank Based Trustees can offer many Advantages at Affordable Fees

Part 2

Author’s note: In early 2020 I was preparing for a presentation to be given at the Pennsylvania Bar’s Elder Law Institute in July. The July session was to focus on the question of when a professionally managed trust might be appropriate for families of relatively modest means. As part of my preparation, I contacted 4 small bank-based trust companies doing business in the Williamsport Pennsylvania area. I questioned each regarding their services and costs. Below are the results of my un-scientific but informative survey.

Results of a Survey of 4 small bank-based trust departments serving the Williamsport, PA area. Survey was conducted in January-February 2020 by Attorney Jeffrey A. Marshall of Marshall, Parker and Weber, Williamsport, PA.

Survey of Trust Department 1

1. Do you have a minimum asset size for trusts? What is it?

Prefers $100,000

2. Do you have a minimum annual fee for trusts? What is it?

Yes. $800.

3. Do you base your compensation on the market value of account assets?

Yes. 80 basis points (00.8%) on first $250,000 then sliding scale.

4. What would your annual fee be for serving as trustee for an individual with trust size of $300,000 and $100,000?

$300,000 = $2,325

$100,000 = $800

5. Do you provide bill paying service for trust clients? Is there an extra charge for that service? What is it?

Yes. 16 bills per month at no additional charge. $1.50 per bill for additional.

6. What other services do you provide?

Serves as agent under power of attorney. Serves as agent for agents (e.g., does bookkeeping). Does bill paying and bookkeeping for people who are travelling.  Provides home and assisted living facility visits.

7. Will you serve as co-trustee with a client’s family member?

Yes. Prefer to have sole investment authority.

Survey of Trust Department 2

1. Do you have a minimum asset size for trusts? What is it?

Prefer $120,000 but will take smaller.

2. Do you have a minimum annual fee for trusts? What is it?

Yes. $750 plus $220-$250 for form 1041[trust income tax return] preparation by outside service.

3. Do you base your compensation on the market value of account assets?

Yes. Annual fee is 65 basis points (00.65%)

4. What would your annual fee be for serving as trustee for an individual with trust size of $300,000 and $100,000?

$300,000 = Approximately $2,000 plus $250 for 1041 preparation.

$100,000 = Approximately $1,000 which includes 1041 preparation.

5. Do you provide bill paying service for trust clients? Is there an extra charge for that service? What is it?

Yes. No extra charge. It is included in trust fee.

6. What other services do you provide?

Provides bill paying as a stand-alone service for a fee. Will serve as agent under a power of attorney. 

7. Will you serve as co-trustee with a client’s family member?

It depends. They make this decision on a case-by-case basis.

Survey of Trust Department 3

1. Do you have a minimum asset size for trusts? What is it?

Prefer $150,000 because minimum fee is $1,500 and they don’t like to charge more than 1%.

2. Do you have a minimum annual fee for trusts? What is it?

Yes. $1,500.

3. Do you base your compensation on the market value of account assets?

Yes. 1% up to one million. Then percentage declines.

4. What would your annual fee be for serving as trustee for an individual with trust size of $300,000 and $100,000?

$300,000 = $3,000

$100,000 = $1,500.

5. Do you provide bill paying service for trust clients? Is there an extra charge for that service? What is it?

Yes. Additional annual fee for bill paying is $500.

6. What other services do you provide for trust clients?

They have two CPAs on staff. They will do personal tax returns for clients at a competitive price. Will help with digital signatures on real estate transactions. Provide Medallion signature guarantees. They do assisted-living facility visits.

7. Will you serve as co-trustee with a client’s family member?

Yes.

Survey of Trust Department 4

1. Do you have a minimum asset size for trusts? What is it?

This Trust Department prefers $250,000 but will consider down to $100,000

2. Do you have a minimum annual fee for trusts? What is it?

Minimum annual fee is $500. Do you base your compensation on the market value of account assets?

Yes. Fee is 1% of first $250,000 and declines from there.

3. What would your annual fee be for serving as trustee for an individual with trust size of $300,000? 100,000?

$300,000 = $2,950 annual

$100,000 = $1,000 annual

4. Do you provide bill paying service for trust clients? Is there an extra charge for that service? What is it?

Yes. No added charge.

5. What other services do you provide?

Personal visits to clients in facilities or homebound. They will serve as agent under power of attorney. They provide bill paying to clients without a trust who set up an investment management account.

6. Will you serve as co-trustee with a client’s family member?

They prefer not to serve as co-trustee.