Independent Thinking^®

Not Your Grandfather’s Trust Company

There is an old saying in this business: You can make a small fortune by handing over a large one to a bank trust department. That was certainly the case for almost 200 years, and some would argue that it remains so, at the expense of the private investor who wants to grow and preserve wealth.

The so-called Prudent Man Rule, later known as the Prudent Person Rule, sounded better than it worked, as capital preservation became the be-all and end-all for fiduciaries. Each investment was judged only on its own merits, rather than in the context of the portfolio as a whole, and risk was avoided at all costs. Fiduciaries managed portfolios first and foremost to avoid lawsuits – and performed poorly as a result.
 
The shift to the Prudent Investment Rule in 1992 was more dramatic than its name suggests. Since then, a trustee’s investment and management decisions respecting individual assets must be evaluated as part of the whole, respective of an overall investment strategy, with risk and return objectives reasonably suited to the trust.
 
Change takes time, however. Even long after the adoption of the prudent investor rule, many trust companies differentiate between investing for trusts and for other accounts. To this day, we still hear investors express concerns about establishing a trust, for fear that it will restrict their ability to invest and limit access to their principal.
 
Most trusts should be invested based on the investor’s goals and objectives, in a manner similar to individual accounts. A properly drafted trust, overseen by the right corporate fiduciary, can be a very powerful tool to protect a family and ensure that an investor’s wishes are carried out. Investment vehicles that were once the preserve of institutional investors can now be used to complement the overall strategy of the trust and to provide specific opportunities to satisfy its risk and return objectives.
 
For example, consider a trust created for the benefit of a spouse, often referred to as a marital trust. The creator’s primary objective is to provide for his or her surviving spouse in the manner to which he or she was accustomed, even to the extent of exhausting its principal. It is our job as trustee to determine an appropriate asset allocation for the marital trust to meet that goal, for the remainder of the spouse’s life.
 
A trust created by a grandparent for the benefit of his children and grandchildren that favors the remainder beneficiaries, the grandchildren, by limiting the amount of trust assets available to his children during their lives, serves as a very different case in point. In this example, the trustee must develop an investment objective that balances the interests of all of the respective beneficiaries while satisfying the investor’s wishes.
 
A special needs trust is particularly challenging (and difficult to establish at many other financial institutions). This type of trust is funded with a finite amount of money that needs to last the entire life of the beneficiaries, who may not be able to work or otherwise care for themselves. Clearly determining an asset allocation and spending rate based on the goal of protecting the beneficiary for life is the trustee’s primary charge. In special needs trusts, the trustee often has to determine the appropriate social and medical treatments for the beneficiary in addition to managing the assets. There are many reasons a family might wish to establish a special needs trust, including cases of addiction and mental illness, and to appoint a skilled corporate trustee to help manage issues that could otherwise impact generations of siblings and children.
 
There are a few types of trusts that should be considered differently, including a charitable remainder unitrust, noted on this page and also in Chris Zander’s article on page 8.
 
In general, however, a truly prudent investor will manage a trust portfolio as a whole and, as appropriate, to grow wealth as well as to preserve it.
 

 
Jay Springer is a Partner and Portfolio Manager at Evercore Wealth Management. He can be contacted at [email protected].