0:14 Hello and welcome to Trusts and Estates Weekly. I'm your host Kevin Bemel and we are here every Monday morning at 10:00 a.m. Pacific. That's 1:00 p.m. Eastern time and we talk about all things related to estate planning, probate, trusts, estates as the name might indicate both from the standpoint of your personal financial planning as well as from the the position of those seeking to assist in estate planning and and trust and probate and estate
0:49 services. So, either for people already involved in that or who are in a profession that they could extend their business into this area um and and and do some more good for their clients. So, this morning I'm going to talk about trust companies and professional fiduciaries and and and the sort of the benefits and limitations of each of them. These are the two most common types of trustees
1:26 or or for that matter executors or administrators outside of somebody appointing an individual and in in talking to um other people I know who are involved in this area, you know, one of the things we discussed is um how much more complicated it is nowadays than it was even 20 or 30 years ago. So, you know, someone acting as a a trustee, I'm just going to use the word trustee kind of as
2:02 in in a general sense. Could really be an executor or an administrator or for that matter really even a a conservator or or a guardian. But someone acting in that position these days is bound by a very high standard of care such that even if they make an honest mistake, that may still constitute a breach of their duty. And and so, you know, the times when perhaps you know, an elderly spouse might you
2:39 know, administrate their their family living trust or or might serve as an executor for an estate something like that or or where a child would that may not be a good idea anymore. Especially if that person doesn't have a reasonably high level of financial sophistication as well as the ability to understand and appreciate the various legal issues such that they're they're getting proper guidance
3:15 in fulfilling that role. And so, that's part of the reason why here in California there is now a licensed profession known as a professional fiduciary and other states require various levels of qualifications for individuals to hold those roles. And and of course there have been trust companies for a long long time who have also held that role. So, I'm going to um as I often do share my screen. I
3:52 prepared a little um uh a little um PowerPoint here. Okay, there we go. Okay. So, you all know our show, Trusts and Estates Weekly, and this is the three pillars of attainment, which is of course the basis for everything we do on the way to Wow shows. Ooh, wow, that was weird. Um we're dealing primarily here in the finances realm of the Pursuits pillar. Um however, relationships often are a big part of estate planning and dealing
4:28 with trusts and estates, um unavoidably so. All right. So, first of all, I want to start out by talking about what are these two um types of trustees. So, I spoke a little bit about a professional fiduciary. Okay, so professional fiduciary is an individual. And and and and that's a natural person individual, as opposed to a corporation is a legal person, and in that sense it's an individual, but it's not a
5:04 natural person. Okay, so in this case we're talking about a flesh-and-blood human being, okay, like me. Okay. Um they are licensed or certified. Um and you know what, let me I'm going to um close out of this sharing and and bring up um actually I uh another uh another image. Let me find it here real quickly. I should have had this up. Okay. All right, here we go. So, let me now let me share again. Share
5:41 screen. Okay, here we go. All right. So, this is an image off of the website for the um um uh CGC, okay? CDC is the Center for Guardianship Certification, I believe. Okay? They're actually um more concerned with uh um conservatorships and guardianships. Um and this shows you this is a map of course of the United States and it shows you it's mostly here in the west
6:19 that there are rules about um who can practice and and who cannot. Okay? So, you'll notice California is the only one in this sort of blue color. That's because um California um has a um a state um licensing and certification um regime, okay? And that that's what I am. I'm a licensed California professional fiduciary. Okay? So, in um Washington, Arizona, Texas, and Florida, notice they're in this red regime, okay?
6:55 So, they have a state administered registration, certification, and licensing program. Um however, it's for conservators and guardians. So, to be a trustee um or an executor or something like that, you you um at least in my reading of um the rules for those four states, um you don't need to um you don't need to have a uh certification or license, okay? Whereas in California to fill any of those roles, um
7:31 well, you can fill one without being licensed, but any more than one and at a time and you have to be licensed, okay? Then you'll notice these states in um the sort of gold color. Okay, so in this case CGC certification is required. So that's a certification through the center for guardianship certification. And again, it's it's necessary to be a conservator or a guardian. It's It's Again, my read is you don't need to have that CGC certification to be a trustee, especially since the CGC has
8:07 has nothing to do with trusteeship, okay? And you'll you'll notice here I have certain ones checked and certain ones with a zero and certain ones with an X. So this is respect to the states that I practice in. So the ones where there's an X and there's I think three of them here. These are states that they have requirements that for one reason or another I I don't want to meet and so I'm I don't practice in those states. The states where there's check marks, I meet those requirements already. And the states where there are zeros, there it means I'm I'm open to fulfilling their
8:42 requirements. I just haven't done it yet. And then you'll notice most of the rest of the United States has no requirements at all. So I was speaking to a friend in New York the other day who is an accountant. I'm sorry, who's a non-accountant. She's a financial services professional looking to expand her business and I suggested to her that she might consider acting as a professional acting as a fiduciary professional fiduciary. There are no licensing requirements in California to I mean in New York to do
9:18 that. Okay, so this gives you an idea of sort of the the patchwork and it is a state-by-state thing. For professional fiduciaries, there is no such thing as a national nationally certified or licensed professional fiduciary, okay? And you can see so I've been talking about this category here, professional fiduciary, but also lawyers and accountants often times will fill these roles. So, these are the three most common um in addition to, like I said, individuals like a family member. Okay, so that's a professional fiduciary. A
9:54 trust company then is a company um it can either be specifically formed in order to act as a fiduciary, or it could be a part of a bank, and that bank could be state chartered, it could be nationally chartered, it could even be a foreign bank that is permitted to do business here in the United States, and they have what are Usually they're not called trust companies, they're usually called trust departments, but in if they in fact act as what would amount to a trust company, okay? So, it's a uh in
10:31 essence a financial institution, even a an independent trust company that isn't connected with a bank is essentially a financial institution. You'll see what I mean in a minute. And it's authorized to act as a fiduciary, okay? And it's a typically a large multi-person firm, okay? So, I'm going to I'm going to show you um here in California, here it is. Um so, the Department of Financial Protection and Innovation is the state department that oversees uh
11:08 trust companies, and I'm going to go back here's one and oops, two actually, here you go. Okay, so trust companies and departments, see they they basically fall under the same category here, okay? And um they're actually essentially licensed through the um uh the Department of Corporations and Financial Institutions, right? Hence why they are generally considered to be financial institutions even if they are an independent company, okay? And they're regulated state by state. Now,
11:44 there are national trust companies and they're regulated by the Comptroller of the Currency and and are thus essentially able to provide trust services you know, nationally across state lines, okay? Um but in any event, they're going to be close they're closely regulated companies, okay? As opposed to an individual. All right, so let's go back to our PowerPoint. We're doing we're doing well on time, okay? So, basically, I think the easiest the easiest way to
12:19 think of of them is a professional fiduciary is an individual, a trust company is a company. Um but they've both been in some way authorized to act as a fiduciary, either um you know, formally because they they they're licensed or certified in some way, although as you saw a lot of states don't require formal certification per se, but but if for someone acting in that position and calling themselves a professional fiduciary, if they practice incompetently, I think we can be pretty you know, pretty sure that
12:56 even in a state without a licensing regime or a certification regime, the Attorney General's going to come after them, right? Because they're abusing people's trust. All right? And lawyers and accountants by virtue of being licensed in those professions gives them the ability to be professional fiduciaries. All right, so let's let's look at the benefits now of of the two. So, for a professional fiduciary generally speaking, they're going to they're going to have more personalized attention. Okay, so when I talk to
13:34 prospective clients, that is one of the things that I emphasize because I've always even in my prior life in real estate, I had a very client-focused business. So I looked at what do my clients need to accomplish? How can I aid them in doing that? Now sometimes that meant me performing services for them. Sometimes that meant me bringing in someone else or referring them to someone else who had the specific expertise that they needed. Okay? And because of that I
14:11 I don't know why this does this. And they I had a lot of I have a lot of flexibility in how I can set up a program to serve a particular client. And that's again generally true of professional fiduciaries as well. Because professional fiduciaries even even large active ones are not as large as trust companies, they generally speaking have lower fees. Okay? And and typically their fees will be calculated
14:46 either on a percentage of assets under administration. That's usually what they'll call it as opposed to assets under management which is more of a a securities term. So you'll hear assets under administration AUA. Okay? They may charge a percentage or they may charge, you know, an hourly rate or in some cases even a fixed monthly rate if the if their duties are are pretty standard and don't vary very much from month to month. Okay?
15:21 Um Now a trust company um is is a more or has more typically more comprehensive in-house expertise. So, whereas a professional fiduciary is is probably not going to perform um uh what it what do you what is it called? Um um in investment advising. Um a trust company oftentimes will have in-house invest- investment advisory
15:57 um people. Um they'll have in-house resources. They may even have the ability to execute purchases of, you know, mutual funds and ETFs or whatever. Um or they may do it through an affiliate of a of of their bank if they're a trust department in a bank. Okay? And the other thing that bene- that it is a benefit of trust companies is continuity. So, um if the professional fiduciary were to die, okay? Um there needs to be a plan in place for who's going to take over from that
16:34 person. Now, by the way, there could be more than one professional fiduciary working together. And in that case, there may be a plan that, you know, if if one professional fiduciary dies or retires, okay? So, one of his partners will be substituted in and and there'll be a relatively smooth transition since they work in the same firm and, you know, they know each other's clients. In the case of a trust company, um while there could be an individual in the trust company that's acting as the trustee, the trust company itself can
17:09 also be the trustee. And so, in that case, since it's a corporation, it doesn't die. And so, there's there's there's no worry. People can join the company, leave the leave the company. It doesn't make any difference in the sense of continuity. Um okay, so that that is one of the benefits of a a trust company, okay? I would say that the continuity is more I mean it's it's it's a built-in factor, I think I guess is the best way to put it. Whereas with a professional fiduciary, it needs to be
17:46 considered and actively made sure that that you know that that issue is is dealt with. Okay, so those are the benefits. Now let's talk about the limitations, okay? For the professional fiduciary, depending the the experience of the professional fiduciary is going to be limited by whoever the professional fiduciary is. So if that person is relatively new to the profession, they may have limited experience, okay? Now
18:23 again, if there's more than one professional fiduciary working together in a practice, so you know, together they may have a lot of experience. Now for myself, I've been in business since well, my own business since 1986, right? So that's what going close to 40 years now. And I've had a lot of experience in managing and all that kind of stuff, okay? But I'm I'm kind of an older guy. So you know, someone younger may not have the breadth or depth of experience that
18:59 others may have. So that's something that needs to be investigated if you're thinking about working with a professional fiduciary, okay? Next limitation, because they don't typically have a high level of um, in-house expertise and resources, they're going to be reliant on outside expertise and resources. So, in my case, I don't I don't um, do I don't have, I should say, in-house um,
19:35 investment advisory, okay? So, to the extent that a client needs that service, I'm going to engage another professional, all right? And I did that I don't have in-house counsel, either. So, in the way a typical professional fiduciary works is we work as a team with other professionals to make sure that the client is properly served, okay? So, rather than having everyone as part of our organizations, um, we, you know, we like I said, we create
20:11 a team. Oftentimes, we may be the kind of the team captain, other times the lawyer or the accountant may be the team captain, and and we're, you know, more so kind of one of the players, okay? So, but in any event, um, it's it's it's going to be um, that kind of situation, relying on outside expertise and resources. Finally, um, professional fiduciaries can have conflicts of potential conflicts of interest. And so, that's something that needs, again, needs to be looked at carefully. So, um,
20:48 uh, sometimes, uh, professional fiduciaries provide other services. So, in my case, I'm also a licensed, uh, real estate salesperson. I have an um, a life insurance license. I have several security licenses. So, um, I have to be careful about the services that I provide to make sure that I'm not creating any potential conflicts of interest and making sure that I disclose any to a potential client. Um you know, if to make sure or to be
21:24 assured whether they do or do not exist. Um and and then to make sure that they're handled properly. And that's true of other professional fiduciaries as well, okay? Um and and there could be even um business interests. So, um you know, I I I have various, you know, business partners. So, if one of them um asked me to be a let's say a trustee for their trust, it's not that I can't do it. It's it's that um we would need to recognize any potential conflicts of interest and make sure that they're
21:59 properly handled. All right. So, um with a trust company, one of their limitations is they tend to be less personalized they tend to give less personalized attention and flexibility. Like any larger organization, okay? And especially if you're talking about a large national trust company, all right? They they um typically have a lot of controls in place and to modify those controls for individual clients and sometimes be uh difficult at best,
22:35 okay? So, they're less likely to do that. Now, there are smaller trust companies um that that that um can provide um personalized attention and flexibility, okay? Um but also because of how they're regulated, so they do have to be careful, okay? So, there may be uh certain things that they'll be less likely to want to do um just because they don't want to skirt, um, you know, the edges of the regulatory regime. So, um, you know, again, that's something to
23:11 talk to a a trust company or if you're, you know, if you're looking for a trustee or or, you know, someone to act in in a fiduciary capacity, um, as you talk to trust companies, um, that's an important issue to discuss with them. Um, what kind of personalized attention and flexibility are you going to get. Now, the next one sort of um, it it is related to this and that is the turnover of personnel. So, um, in a trust company, um, because it's it's typically a larger organization, you
23:46 know, people come and go. So, um, you know, a person handling a particular account, they may be there a few years and then they move on or they may get promoted and they're no longer doing frontline account services, that sort of thing. So, they may still be in the company, um, but they're not going to be the person that, uh, someone deals with, uh, beneficiary, for example, deals with on a day-to-day basis any longer. Okay? Whereas with a professional fiduciary, you know, that that person is essentially that not essentially that person is the fiduciary. So, that that
24:21 person's going to be there. Okay? And then the other, um, limitation on trust companies is they tend to have higher fees. So, it's not unusual for a trust company to charge between a quarter of a percent and 2% of, um, assets under administration as as their fee. So, for example, if they're managing a $20 million trust, okay? Maybe they're charging, let's say, even a half a percent, um, that's uh, roughly, um, let me sure I'm
24:57 doing this right. Um let's see, 1% of 20 million No, I'm sorry, they're going to charge more than that. So, they're going to charge probably about 1% I suspect of of 20 million assets. That's $200,000 a year. In fact, they may even charge uh a little more than that. They might charge, you know, a percent um and a half. So, it could be $300,000 a year to manage um uh you know, a trust with those kind of assets. All right. So, um that is again another
25:32 um issue to consider is, you know, what is the fee structure? Um how is how is that going to impact the performance of the assets in the trust? Okay. Well, I think we're doing all right. All right. So, which one is right for you? Um that is not a question that I'm answering today, okay? I'm giving you some basic information. This is not, you know, legal advice, financial advice, anything like that. It's making you aware of issues. So, as you decide or or
26:10 as you work on making a decision as to which is right for you, um I I I recommend considering these four points. First of all, what are your individual needs, especially as they connect with the various benefits and limitations of the two? Okay? Um next is um what what is your preferred manner of working? Okay? So, um do you like a lot of flexibility? Do you bristle when being told, "That's not
26:47 in our policy. We can't do that." right? Um if those kinds of you know, if are going to be issues for you, um, then a professional fiduciary that offers you more flexibility may be a better choice than a trust company. Okay? Now, I should hasten to add that, um, professional fiduciaries tend to not work in the very high-end of of of trusts and in the very complex trusts. Once you get into, um, you know, kind of nine-figure trusts, in that case you probably are
27:23 going to be dealing with a trust company, okay? Um, but and so that gets back to individual needs. What is the size of the trust, etc. Um, although I can imagine there are some sophisticated, um, fiduciaries out there, lawyers, etc., who are trustees on on on large trusts. Um, okay, so how do you like to work and and and how can that be best accommodated between a professional fiduciary and a trust company? Next, what pre-existing relationships do you have? So, do you already have a
27:58 relationship with a lawyer? And so, you have no need for in-house counsel. Do you already have an investment advisor that you, uh, work with? And so, you would have no need for, uh, you know, an in-house investment advisor. Well, and and if you value those pre-existing relationships, so that might, um, kind of push you in one direction. If you don't have those pre-existing relationships, and you like the idea of it all kind of being in-house, so then that might push you in in the direction of a trust company. Okay? So, again,
28:34 these are all, it all gets back to what your, uh, individual needs are. Okay, and then finally, what is your budget? What can the, uh, trust or the estate that you're dealing with sustain in terms of fees in order for it to be managed well, okay? And especially as you move into smaller and smaller ones, um it can get harder and harder to afford a trust company, okay? So, if you've got a two or three million dollar trust, okay? Where what you might say,
29:11 "Well, gosh, you know, 2% of $2 million is let's see, 2 million, 200,000, 20,000. That'd be about $40,000 a year, okay? Uh if I I hope I'm doing the math right on that. 2 million, 10% would be 200,000, 1% would be 20,000. Yeah, $40,000 a year um to manage that $2 million trust. That's that's pretty high, okay? Um but that's probably what a trust company is going to need to charge and may maybe even more, you know,
29:49 to manage the trust properly within their systems, okay? So, think about your budget, um you know, what what can what can you afford um in in that's that's not going to so substantially um um uh take money out of the funds generated by the trust that, you know, the the managers are getting all the money or the fiduciaries getting all the money um and there's nothing left for the assets to grow or to pay over to the beneficiaries. Okay, so that is the difference between
30:28 a a professional fiduciary and a trust company. And if you need help, here's some places to do so. This will also be in the show notes. You have my email address, various um social media outlets. Feel free to post uh a question, especially if it's a general question. If you have something specific to your own situation, um especially if it's something that you want to be private, so then please don't post that publicly. Feel free to send me an email, um although don't include um you know, private financial information or anything like that.
31:04 Um if there's anything that needs to be looked at in that regard, we'll arrange to have it uh transferred in in a way that protects the integrity of the data. Okay? Um but in any event, please do feel free to reach out to me if you have any questions. I'm happy to help you. Okay? Here's the legal stuff, as always. Blink. There we go. Stop our sharing. So, that's our show for today. Um pretty straightforward in the sense of what these are and how they work. Not at all straightforward in determining which will be which would be best for you. That that is as in in all of these
31:39 things, is really an individual um decision and something that has to be looked at very carefully before deciding. So, thanks very much for joining me. Um want to mention that tomorrow at 11:00 a.m. Pacific time is business lessons from the military. We're going to be continuing our discussion of how to use intelligence doctrine um in Marine Corps warfighting doctrine in a business setting. Okay? It's um interesting topic, I think you'll find. So, we're going to be moving on to the next part of that. And then on uh
32:16 Wednesday at 12:30 p.m. Pacific time is people making money. And our topic this week are um um tax breaks for 2023. So, it's already what? The middle of November. And there are um some strategies that you might want to discuss with your accountant or your tax preparer getting ready you know to file your taxes for this year. Of course, you don't have to file them until next next year that you know the deadline next year. Nonetheless, there are certain things that you may want to take a look at now and even if you and
32:53 especially if you prepare your own taxes. So you know, you you may not have anyone kind of pinging you and saying hey, have you looked at these things it's it's you know, we're heading toward year-end. So it's time to give some thought to that. So that'll be on Wednesday again 12:30 p.m. Those are all Pacific times. So thanks again for joining me here at the beginning of the week Monday for trusts and estates weekly. I appreciate it. And if you know of someone who's you know dealing with these issues do them a favor maybe send them a link to um the the the show list so they can see
33:29 the different episodes that are available and that may might help them maybe suggest that they subscribe to our YouTube channel so they can always be notified when a new a new show posts. So again, thank you very very much for joining me. Look forward to seeing you again later this week and signing off. Marie Dorion. You are