The question of whether to engage professional asset managers for a bypass trust—also known as a credit shelter trust or an exemption trust—is a common one for estate planning clients in San Diego and beyond, and the answer is nuanced, depending heavily on the size and complexity of the trust assets, and the beneficiary’s financial acumen.
What are the benefits of professional trust management?
Employing a professional asset manager, such as a trust company or registered investment advisor, brings several advantages. They provide expertise in investment strategy, portfolio diversification, and ongoing management—skills not everyone possesses. Approximately 68% of high-net-worth individuals report needing assistance with investment management, according to a recent survey by Cerulli Associates. These professionals can navigate market fluctuations, rebalance portfolios, and ensure the trust assets are growing in accordance with the grantor’s intentions and beneficiary needs. Further, professional managers offer an objective perspective, removing emotional biases from investment decisions, and importantly, they also shoulder the fiduciary responsibility, protecting the beneficiaries and the grantor’s estate from potential legal challenges. This can be especially crucial when dealing with complex assets like real estate, business interests, or alternative investments.
How much does professional trust management typically cost?
The cost of professional trust management varies, generally ranging from 0.5% to 1.5% of the assets under management annually. While this represents an expense, it’s vital to weigh it against the potential for increased returns and reduced risks. Consider that a poorly managed trust, even one without management fees, could lose significant value due to poor investment decisions or market downturns. I once worked with a client, Mr. Abernathy, who had established a bypass trust but attempted to manage the investments himself, lacking the time and expertise. He held onto a single, failing stock for far too long, driven by sentimental value, resulting in a loss of over $150,000. Had he engaged a professional manager, the losses could have been mitigated, and the trust assets preserved for his grandchildren.
What happens if my bypass trust assets are simple?
For bypass trusts with relatively simple assets—such as publicly traded stocks and bonds—the need for professional management may be less pressing. A trustee with basic financial literacy and a willingness to learn can often manage these assets effectively. However, it’s crucial to remember that even seemingly simple investments require ongoing monitoring and adjustments. Many individuals underestimate the time commitment involved in managing a trust, especially when dealing with tax implications and reporting requirements. The IRS imposes strict rules regarding trust income and distributions, and non-compliance can result in penalties and legal issues. I recall working with the Harrison family whose patriarch, a retired engineer, was named trustee of his bypass trust. He diligently managed the portfolio for several years, but after a stroke, his daughter, unfamiliar with the investments, struggled to maintain the strategy, leading to missed opportunities and diminished returns.
Could a co-trustee arrangement be a good compromise?
A co-trustee arrangement—where a professional asset manager serves alongside a family member or trusted friend—can offer a compelling compromise. This allows the family member to maintain involvement and oversight while benefiting from the professional’s expertise. The professional can handle the investment strategy and ongoing management, while the family member provides input on the beneficiaries’ needs and preferences. This approach fosters transparency and collaboration while mitigating the risks associated with relying solely on a non-professional trustee. I recently helped a client, Mrs. Chen, establish a co-trustee arrangement for her bypass trust. She appointed her daughter as co-trustee alongside a local trust company. Her daughter, while not an investment expert, understood the family’s values and charitable interests, and the trust company provided the financial acumen to maximize the trust’s growth potential. The result was a well-managed trust that fulfilled both the financial and emotional needs of the beneficiaries.
“Proper estate planning isn’t just about transferring assets; it’s about ensuring your wishes are carried out and protecting your loved ones.”
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