Should you appoint an institutional trustee?

The benefits of a trust are well known, be it for succession planning or philanthropy . The success of a trust depends on two major factors: Identifying the right beneficiaries and appointing appropriate trustees. When it comes to the latter, the easiest and most obvious option is to assign a person known to you. However, it may not be the best option.Family members or friends could be biased in operating the trust. Moreover , they may not have the skills required to administer the trust. This could lead to problems , including legal battles between the beneficiaries and trustees, in the future. Instead, you could consider an institutional trusteea bank or a firm that specialises in trusteeship services.
You may ask why you need to be diligent while choosing a trustee, considering the fact that he will have to abide by the rules or limits set by you as the founder of the trust. Despite laying down a strict mandate for trustees to follow, they may need to take decisions for which you may not have given any instructions. “It is extremely difficult to envisage every possible situation and you could miss out on some important aspects. In such a case, the trustee will employ his own judgement,” says Richa Karpe, director, investments, Altamount Capital. Besides, a trustee is entrusted with assets that are to be used for the benefit of a third person. In case of fraud or misuse, the very purpose for which the trust has been set up will be undermined. So, choosing the right trustee is critical to such a set-up .
Why opt for an institutional trustee
You may not perceive the job of a trustee as a professional one, but if you consider the associated responsibilities and duties, the need for one is likely to be felt. “For instance, there is a large amount of paperwork, from ownership documents to evidence relating to transactions. All of it should be carefully preserved,” says Adrish Ghosh, head of wealth advisory, Barclays India.
As a part of trust housekeeping, the trustee may also have to preserve every small receipt relating to income and tax payment. This becomes especially important for the trustee to safeguard himself in case of future litigation. If the trustee is sued by beneficiaries for alleged fraud, he may be required to produce documentary evidence to prove the reasons for taking certain decisions. An institution is better equipped to handle such matters as it will have professionals on board to deal with legal issues.
The biggest advantage of appointing an institutional trustee is that it is unlikely to be biased. A family member or friend may favour one beneficiary over another and, subsequently, the dissatisfied beneficiary may appeal in a court of law. Also, the chances of an institutional trustee cheating are much lesser as an organisation like a bank has many safeguards to check such activities.
Private players
These days, several banks have set up specialised units for providing estate planning services, including those for trusteeship . Many former bankers and wealth managers have also established family offices that offer the services of trusteeship. Now, even private players have cropped up in the market. However, you should be careful while appointing a private player as a trustee. Conduct a background check for the firm and the people responsible for setting it up. A large bank or an established corporate is unlikely to pack up suddenly, but in the case of private players, there is the risk of their turning out to be flyby-night operators.
What’s the cost?
Delegating an individual as a trustee will certainly cost you much less than appointing an institution. Usually, a trustee is given some remuneration for administering the trust. In the case of a family member or friend, the amount may be very little or negligible. On the other hand, an institution will cost you much more. Some institutions charge a fee that is a percentage (generally 1-2 %) of the total value of the trust, while others charge on the basis of the work hours put in to administer the trust and the risk associated with managing it. However , if the assets put in the trust are not worth more than a couple of crores, an institution may not be an economical option for you.
Is your trustee competent?
Ask these seven questions to figure out if the person or institution you want to appoint is capable of managing a trust.
Have you managed a trust in the past? Are you capable of managing complicated paperwork? Are you well-versed with the law that governs trusts? How will you safeguard assets to ensure that funds are not embezzled? Are you related to or know intimately any of the beneficiaries? (This will help determine whether the trustee can be unbiased.) Are you on good terms with the beneficiaries? Will you be able to take tough decisions for the larger benefit of the trust, even if it is not acceptable to the beneficiaries?