Selecting a trustee for any of the several types of personal injury settlement trusts (settlement trusts) requires consideration of several issues. Unlike most trusts managed by bank-affiliated trust departments, settlement trusts generally involve declining balances as opposed to wealth accumulation or transfer. Settlement trusts also generally require frequent distributions and customer service requests as well as specialized knowledge of federal and state disability laws. Most traditional bank-affiliated trust departments lack both operating systems and administrative procedures designed for declining balance trusts and the specialized knowledge required for settlement trusts. Many settlement trusts do not meet the minimum size requirements of bank-affiliated trust departments whose relatively high overhead costs and personnel turnover also make them unsuitable trustees for settlement trusts.
Only a limited number of banks and trust companies specialize in settlement trusts. As one result, the trustees for many settlement trusts are individual trustees including attorneys acting as trustees. As another result, more non-banking companies and individuals are offering to partner with settlement trustees by providing specialized administrative services or by serving as settlement trust protectors. A settlement trust protector is a named party in a settlement trust document who serves an administrative function separate from the named trustee. Purposes for appointing settlement trust protectors might include: preventing disputes or conflicts of interest; providing legal, regulatory, investment, and/or tax expertise; providing personal familiarity with the disabled beneficiary’s condition and needs; or selecting and replacing the trustee.
In comparing alternative potential trustees for a settlement trust, some of the most important considerations include:
1. Experience and expertise – including trust and investment management; declining balance trusts; governmental benefits, as well as laws and regulations applicable to disabled individuals;
2. Conflicts of interest – whether the trustee: manages accounts individually or pools assets; invests in proprietary or non-proprietary funds; lends or pledges trust assets as collateral; and/or separates account supervision from investment services.
3. Availability – who will be responsible for account distributions and customer service requests and what is their availability and knowledge.
4. Minimum required deposit – Many bank-affiliated trust departments require a minimum deposit of $500,000 or more whereas trust companies that specialize in settlement trusts may accept deposits as low as $30,000.
5. Trust fees and expenses – Trust fees can differ substantially in amount and generally include the following categories:
i. One time fees – These fees generally include an administrative fee; a trust installation fee; and a trust termination fee;
ii. Annual fees – These fees generally include an annual trustee fee (based upon a percentage of managed assets) or a minimum annual trustee fee, whichever is greater.
iii. Trust services – Trustees may or may not charge additional fees for: annual trust reports; tax returns and reports; direct deposits; check writing; and wire fund transfers.
iv. Extraordinary fees – Trustees generally charge additional fees for “extraordinary” services such as reviewing trust documents and medical payment administration.
v. Investment commissions – whether paid indirectly through the trustee or directly to an investment banker or broker, trusts incur and pay commissions on investments;
vi. Taxes – Although a trust is a legal entity and has its own tax identification number, most settlement trusts are grantor trusts which require the beneficiary to pay resulting income and capital gains taxes.
The following additional issues should be considered when comparing a chartered bank or trust company (corporate trustee) with an individual trustee:
6. Court supervision – No court supervision is generally required with a corporate trustee whereas individual trustees generally require continuous court supervision;
7. Regulatory oversight – Corporate trustees are supervised by Federal and/or state regulators which require frequent internal audits and perform regular external audits whereas individual trustees have no similar regulatory oversight or fiduciary checks and balances;
8. Continuity – Corporate trustees exist in perpetuity whereas individual trustees may leave because of illness, death or changed circumstances requiring appointment of a successor trustee.
For additional information , see “Settlement Trusts” , “Special Needs Trusts”, “Settlement Planner Definition”, "Structured Settlement Definition", and "Structured Settlements and Periodic Payment Judgments".
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