As you know, most brokerage companies have established in-house trust companies. As an estate attorney, I am familiar with the workings of trust banks. As brokers and advisors, you probably are not — yet. However, you should be, because in many circumstances there are substantial, even compelling reasons to use the trust bank for your clients. And trust accounts can create a relationship between you and client assets that outlives the clients.
Before we get into specifics, you should be aware that there are different ways of working with your trust bank and the rules vary from firm to firm. What works best for brokers is a setup in which putting clients into a trust account works the way putting them into a mutual fund or managed account does: You maintain the account control and take a portion of the management fee. The worst case: just getting a finder's fee for turning over the account to the in-house bank. Even that's better than letting the client take the money out of your company altogether. To get the best terms from your trust bank, reach out and get to know the players now.
Why should you get involved with the trust bank? To preserve wealth for your clients.
In the classic brokerage or investment advisory firm, the account is held in the customer's name at the brokerage or investment company. Or it is a joint account, usually a husband and wife, held at the firm. In either case, the entire account balance upon the death of your customer is an asset of his or her estate, subject to both probate and taxation (possibly both state and federal) if all the decedent's assets exceed $1 million.
With joint accounts held by husband and wife, there is usually no tax at the death of the first spouse. At the death of the second spouse, however, the federal estate tax kicks in if the value exceeds the applicable exclusion ($1 million this year and increasing to $3.5 million in 2009).
In joint accounts with a child or other person on the account with the couple, the entire balance is counted in the estate of the first “joint tenant” to die. You can then subtract what the other tenants added to the account themselves, if money or property was truly theirs. This is called “independent consideration.”
For example, if husband, wife and daughter have a $500,000 account in joint tenancy and one of them dies, that total is in the estate of the first to die. However, if the husband contributed everything, the $500,000 is included in his estate. Nothing can be excluded, because the wife and daughter put nothing into the account.
But if you have moved those accounts to your trust company, the tax picture can improve dramatically. Depending on the type of trust, there will be no probate then and therefore possibly lower costs and faster availability of the funds than with an account at the brokerage. Although the trust company is trustee, the broker or investment advisor can be authorized to direct investments or, if that is not workable, still play a major role.
If the trust is created correctly, the years of effort you devoted to building a $500,000 account into $3 million is not undone by taxes and fees. And you stay in the picture after your client is gone. For how long depends on how the trust is drawn and how long it lasts, but it could be for your entire career. The account does not “walk out” of the shop when your customer dies.
Trusts also protect your customer's family from creditors, including a divorcing spouse, and permit flexible investing. With the federal estate tax rate at 50 percent this year and dropping only to 45 percent by 2009, this is an idea whose time has come. A $5 million estate without trust protection can be whittled down by costs and taxes to perhaps $2 million.
Even if working with your trust colleagues doesn't eliminate death taxes, but saves perhaps $1 million on a $5 million estate, that is an achievement worth pursuing. Your customers face an unending battle to hold on to what's theirs, and you could be their greatest asset, not just in wealth accumulation, but in wealth preservation.
Roy M. Adams is a partner in Sonnenschein Nath & Rosenthal in New York, and chairman of the editorial advisory board of Trusts & Estates.