A bank is a professional trustee, usually appointed by the grantor because of its professional management, for continuity in trustee succession, for the objective exercise of discretion, and to avoid conflicts of interest.
Many grantors avoid appointing banks as trustees due to the misconception that banks charge hefty fees. In New York, however, trustee commission, which covers both professional and non-professional trustees, is provided under SCPA § 2309.
Bank trustee services
Bank services for trust can be divided into two: trust administration and investment management.
Under trust administration, banks serve as trustees, either alone or as co-trustee with the grantor’s family member or friend. Under this role of trustee, the bank does the following, among other things:
- distributes the assets to the beneficiaries in accordance with the trust agreement;
- file state and federal tax returns;
- maintain custody over trust assets, such as stock certificates, title deeds, and bonds.
The bank’s trust department also offers investment management services. Here, you direct your bank to invest and divest the trust assets, under the provisions of the trust agreement and taking into consideration the standard of care required under the “prudent person” rule.
Under this rule, which is a higher standard of care required of fiduciaries, the funds should be managed in good faith and with the care an ordinarily prudent person in a like position of discretion and intelligence would exercise under similar circumstances. In analyzing whether the funds were managed in a prudent manner, the following factors may be taken into consideration: general economic conditions, possible effect of inflation or deflation, expected tax consequences of investment decisions, the expected total return from income and appreciation of investments, and the role that each investment plays within the overall investment portfolio.
If the bank acting as trustee and investment manager fails to preserve the trust assets prudently, the bank may be surcharged by the beneficiaries through a filing of a surcharge action. Matter of Donner, 626 N.Y.2d 574 (1993) explains the surcharge actions:
“To warrant a surcharge, the objectors must show that the trust’s losses resulted from the trustee’s negligence or failure to exercise such prudence” (Matter of Hahn, 93 AD2d 583, 586, affd 62 N.Y.2d 821). Whether a surcharge should be imposed in this instance depends on “a balanced and perceptive analysis of [the coexecutors’] consideration and action in the light of the history of each individual investment, viewed at the time of its action or its omission to act” (Matter of Bank of N. Y., 35 N.Y.2d 512, 519).”
Under SCPA § 2309, New York trustees, whether banks or individuals, are entitled to commission for their work, unless the trust document specifically prohibits it. Usually, most trustees are paid commission, except for family members and close friends. For banks, this commission only applies to trust administration services and not investment management services.
New York provides for two types of commissions that trustees can get: annual fees and paying out fees (when the trust is being terminated).
Annual commissions are computed at the following rate:
- $10.50 per $1,000 or major fraction thereof on the first $400,000 of principal.
- $4.50 per $1,000 or major fraction thereof on the next $600,000 of principal.
- $3.00 per $1,000 or major fraction thereof on all additional principal.
Paying out commissions are computed at 1% of the principal amount being paid out.
There are several trustee commission calculators online that you can use to get the exact computation for trustee commission.
The bank’s investment management fees, on the other hand, is usually a percentage (normally 1%) of assets or a flat fee.
Bank vs. other non-professional as trustees
Some grantors will choose a bank as a trustee because it avoids conflict of interest, they have years of professional management expertise, they can be objective in the exercise of discretion, and there can be continuity in the administration.
Usually, when trustees are beneficiaries, contingent beneficiaries, or remainder beneficiaries, they have an interest in the trust assets. For example, if the trustee is a remainder beneficiary, the trustee has an interest to preserve the trust assets so the trustee can have a lot of remainder left. When exercising discretion on whether to distribute the principal, the trustee might, more often than not, not distribute the principal. In the case of a bank, the objectivity, impartiality, and independence may be trusted since they don’t have an interest except for their commission. Thus, banks as trustees are perceived to avoid conflicts of interest with their professional and independent management.
Banks as trustees also ensure continuity in administration. Usually, trust agreements appoint one or two successor trustees. However, when these successor trustees have died or become incapable, problems may arise on who the next trustee is. In the case of the bank, continuity is assured because even if the bank executive handling the trustee account from the bank resigns, the bank can simply appoint a new bank executive to handle the account.
Non-professional trustees, on the other hand, may be considered as amateurs, with interest, and without expertise. Even if a non-professional trustee has no interest, the lack of expertise may be considered a problem. However, a non-professional trustee can retain the services of an attorney, accountant, and/or financial advisor to help him manage the trust. For this reason, there is no reason to choose a bank over a non-professional as a trustee, except for the personal reasons of trust and confidence of a grantor.
Banks are a viable option as trustee, but they are not the only option. Non-professionals can be effective trustees, especially with the right legal, accounting, and financial advisory team behind him. Should you need assistance as trustee or beneficiary, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York, NY, Brooklyn, NY and Queens, NY. You can call us at 718-509-9774 or send us an email at firstname.lastname@example.org.