THE GRAHAM LAW OFFICE, P.A.

Boise, Idaho

WHEN TO USE A CORPORATE TRUSTEE

A Learn at Noon Workshop - March 18, 2008

Presented by: Susan M. Graham, Certified Elder Law Attorney

Guest: Tom Prohaska of Idaho Trust National Bank

Susan Graham: I thank you for joining us at this Learn at Noon Estate Planning event with me and my guest today, Tom Prohaska. Tom Prohaska is the president of the Idaho Trust National Bank, and what we're going to talk about today is when to use a corporate trustee. Tom, when do you think is an appropriate time to have a corporate trustee?

Tom Prohaska: Well, Susan, thanks for the opportunity to let me join you and your listeners today. It's a real privilege to do that, just briefly as a background to sort of respond to that, in my ten years of practicing law before founding Idaho Trust and now in the last, I guess, 14 years of being the president of the bank and watching as we have assisted clients that have been their own trustees or who were providing investment management services, or in cases where we act as trustees I would say that, in general, the first thing that we're looking for is those cases where the choice of a family member is not going to be the most effective way to accomplish the goals and objectives of the makers of the trust. So where we're going to be most efficient for people is when we can step in and try and minimize some of the negatives of having an individual trustee and, in doing so, accomplish the goals and objectives of the makers of the trust. I think that's really when a corporate trustee makes the most sense.

Susan Graham: Does someone have to have an estate plan using a trust as a base for you to provide services?

Tom Prohaska: Not at all, no, not at all. We can act as a fiduciary in somebody's will or we can act as trustee of a trust, as well as then we provide the investment management services for those people if they're acting themselves in that capacity.

Susan Graham: Let's talk about the three different levels of when a trust department might be the appropriate way to have money handled. First of all, someone does not want to handle their finances. That means that they don't have the skills to do it, they're too old to do it, they're worried about mistakes, it's too big, or they don't have the expertise. When would be the best time to call your bank?

Tom Prohaska: This usually comes up, in two circumstances. Either, it's going to come up when a single individual, or maybe a couple, find themselves in the circumstances that you described, and maybe see the handwriting on the wall, so to speak, and say, "You know, I'm getting to the point where maybe I don't want that responsibility, so I'm going to contact Idaho Trust, or some other corporate trustee, about acting while I can still watch over what they're doing." And at that point maybe what Idaho Trust, or a corporate trustee, is hired to do is to just provide investment management services and some general advice to those individuals, or that individual, where they stay in charge of their living trust, and then at some point they resign and then we take over and they're still alive. I do think that's probably one of those circumstances and for those people who can look ahead a little bit and just sort of feel where they're going, and might like to watch over whoever their choice is to make sure it's the right choice, that's probably the preferred way to do it. Alternatively, we are there for people when they just can't do it anymore, and they need to make a change right now. Or maybe the kids are watching Mom or Dad and say, "Hey, we need somebody else to take care of that." In those circumstances we can take over. I think it's a little better when somebody can have a little bit of foresight because then they can educate us on how they like things done, and what their preferences are, so that's really the preferred time to have that transition.

Susan Graham: When you do that, when you handle the money for someone, do you treat everybody the same? Do you have the same investment objectives for everyone, or is there a way that you make it unique for each of your clients?

Tom Prohaska: Well, I think that's a wonderful point, and that is we want to make it unique for everybody because everybody has got a unique circumstance. Of course, there are certain commonalities; we start with the premise that, to the maximum extent possible, we don't want that client to ever lose control. We want them to stay in charge and in control to the maximum extent they can. Number two: we don't ever want to do anything that is going to be irrevocable. In other words, just like the living trusts that are revocable documents, we don't like to make investment choices that are irrevocable. We want things that can be structured uniquely for the needs of the individual clients that we have because they're going to have different income needs, different capital preservation needs, and so everybody gets their own unique solution.

Susan Graham: When you do that, do you have regular meetings with these individuals so that if their objectives change this plan easily can change with that?

Tom Prohaska: Yes, you bet. I think that is very important. You don't want to have something that is an off-the-shelf, non-changeable solution. People's circumstances change, I'll give you a great example: we've had clients who have come to us and said, "Well, you know, I'm getting a point where I don't feel comfortable managing these financial affairs anymore, I need someone to step in and make some of the decisions. I don't follow stock markets like I used to, or I need someone to come in and help with some of the basic bill pay functions," all services we provide, and they may say, "And that's going to allow me to focus a little bit on some of the final things, or family things, I'd like to do." And we develop a plan and we move, and go forward, and then maybe two years later that person is now in a different health situation or a different family situation and they need us to modify the plan to accommodatemaybe increased income needs, or principle needs, that they may have, and so it's got to be-we've got to be-able to adapt to that.

Susan Graham: What about when someone dies, when would it be appropriate to use a corporate trustee and when would it be appropriate to use a family member or somebody else?

Tom Prohaska: Well, I think probably one of the most common areas, Susan, that we see individuals using the corporate trustee is when we have the death of one spouse and we have a surviving spouse. And, at that point, often times, the survivor may just want somebody to come along side and give some assistance, in addition to the great legal advice and assistance your office would give, and we help take some of the pressure off for making all the decisions that have to be made, and develop a plan that is going to meet that individual's goals and objectives and also gives them a third party to execute for them. I think that's really a key, particularly if the surviving spouse maybe doesn't have a lot of experience in that area. Alternatively, you're going to see us acting after the death of someone, whether it's a spouse or after the death of an individual, where there is the potential for conflict between family members. For example, if we have a husband and wife who are in what I refer to, and many others do, as a "blended family." We've got children from both spouses, and maybe even combined children together, where there may be, after the death of one of the spouses, the tie that bound everybody together is gone. Now we have, a surviving spouse, and we've got children from a prior relationship that's now survived that particular parent, and we've got the potential for conflict between those kids and the surviving spouse. That would be the place for the corporate trustee to step in. Alternatively, in a circumstance where both spouses have died and we have two groups of kids who are in that situation, and we just want to avoid conflict, we need a neutral party there just to cue on the terms and conditions of the estate plan.

Susan Graham: When you have children that have a dispute, let's say we have kids from different marriages, or even children within the same family that don't get along, how do you handle that as a corporate trustee?

Tom Prohaska: That's our number one goal. Our number one goal is to have impartiality. We don't take sides. We look at the documents that have been drafted and we're going to act as impartially as we can, setting aside the family conflicts that may be the underpinnings of those disagreements.

I'm reminded of a case that we had one time at Idaho Trust where we had two groups of kids; Mom and Dad were married while these kids were still relatively young. Many decades passed and Mom and Dad were now deceased. They had named the bank to be the trustee, and it was a good thing. These two groups of kids, particularly one child on each side had a lot of animosity, ultimately, that was in the background that had never really bubbled to the surface until the question of money was in play. We were making some decisions and these folks were, by all accounts, a very good family relationship, now were suffering some real challenges. And, I asked one of the kids, why, exactly, they had such hard feelings, and he said, "Well, you know, when my step brother was twelve years old, he got a brand new bike at Christmas. I never got a brand new bike. I could never understand why my parents treated him better than me, and, you know, I'm not going to let it happen now when we divide everything up." That had been 50 years ago, but they never forgot it. You need somebody in those family circumstances, sometimes, who can just step in and say, "I'm sorry that happened, but we've got a plan, it's in writing, they've worked with their attorney"-somebody like you Susan, who's done a great job-"and drafted it all up, it's very clear, there's no disagreement, we're just going to execute, and that's the plan. I'm sorry you didn't get the bicycle." We're impartial and we're going to be neutral about that.

Susan Graham: When you have young children whom need to manage money-often times the arrangement is to manage the money for them until they get to be older and until they get to be more mature. How do you handle dealing with their education when the papers say, cover their health support, maintenance, and education? How do you decide how to allocate money?

Tom Prohaska: I think that's a very valid question, in that it really goes to two duties that we have. The first duty is to have a certain level of expertise, we have to be able to read the document and discern from it what the intent of the maker was. Let's assume that in doing that, we see that there's a very clear language, it says education, we know we can apply to education, but what does education entail? Which is basically your question. Then, you have to exercise judgment and you have to look at the human reasons behind why people do an estate plan. This is, I think, one of the real distinguishing characteristics that, certainly our bank, thinks it has over other corporate trustees is: you can't look at these things as some legal abstract, you have to look at the human reasons. I've never met a single person who did an estate plan for some legal, or other reason, as their primary reason. They do it because they have human goals for the family. In the case you described, they have a goal that that child gets an education. What you have to look at, if it's just broadly education, and they want to go to trade school, and that's really where they're best suited, then we want to pay for that. If somebody needs to go to Harvard because that's where they're best suited, we want to try and pay for that. Where we get challenged is when the person comes in and says, "Look, it says pay for my education and that includes things that go along with education, doesn't it?" Well, sure, I guess your books and so forth, yes we want to help you with that. I'm reminded of the time somebody said, "Well, you know, I need a car because I live off campus and I need to get to campus for my education." Ok, kind of what are you thinking about? "Well, you know, I don't like to get up very early, so I'm always running late, so I need a fast car, and I'm thinking a corvette." And there we said that's not part of education! So, I think it's some discretion, that's really what we have is discretion, and at Idaho Trust, like many places, those things are made by close contact with the individuals involved. We know them, we know what the needs are, we talk to the relevant family members if that's important, and get an understanding. I think that's a big concern, people think the corporate trustee is going to act in some big bank way that doesn't take into account those human needs, and the beneficiary is going to be begging the institution for money. It just doesn't work that way when you have the right corporate trustee.

Susan Graham: If the trust is set up so that the money is finally distributed to this person when they are 30, do you work with that beneficiary prior to that distribution to help them understand how to handle those funds?

Tom Prohaska: Absolutely, and that's critical, I think, because whether it's $100,00 or $10,000,000 that they're going to get, that's all they're ever going to get from that estate, or that trust, that's the final distribution. So, it's really critical that we take some time building up to that point educating them, letting them understand what we're doing, how we're investing money, how it impacts them, so when it does pass to them, whether or not they continue to use us, they're making good, sound investment decisions. I'll give you a great example of that, we had two young people here in Boise who inherited some money from their mom, and, unfortunately, she died at a very young age and one of the kids was 17 and other was 19 when she died. Over the next several years-they ultimately got their money at age 23, each of them had time with us, we talked about the investments, we educated them on what a stock was, and a bond was, and how to put those things together, and why not to spend all the principle. I'm very proud to say that both of those people have hit their age, they've received the distributions, and both have not blown the money on a brand new car or some expensive vacation. They're being very responsible with it and it's been a pleasure to watch. It goes to that education process of helping them understand the advantage that that inheritance gives them.

Susan Graham: What about, in the circumstances when people have a disabled individual who's going to receive an inheritance, often those funds are placed in what's called a "special needs trust," which is an unusual trust to allow them to continue to receive the disability benefits from the government and have this for extras. Those are very difficult to administer, how do you go about doing that?

Tom Prohaska: I think you said a couple of key things there, and that is those are unusual trusts, they are complicated trusts, they have some very strict legal rules behind them, and there, actually, again-whether it's Idaho Trust or somebody else-I would venture to say that you should always have a corporate trustee in those circumstances because of those levels of complexity, and wanting to preserve the benefits. It's important in those cases, like it is in some other specialty trusts, whether it's an irrevocable life insurance trust or some other types, to have a corporate trustee who can administer it according to those complicated rules and regulations, because they're experts. A corporate trustee has the expertise, the sophisticated processes, and trained individuals, who administer these kinds of trusts. I think there are many times where an individual can act as a trustee of a special needs trust, but the reality of it is, in these more complex cases, there's almost never a circumstance where an individual ought to be acting alone in those cases because it jeopardizes the intent of the trust. We administer those very, very carefully because even with as much expertise as we may have, you have to be very careful about how you execute on those.

Susan Graham: If somebody was named individually as a trustee of a special needs trust, would your bank be willing to work with them so that they could assign that work to you?

Tom Prohaska: Absolutely. And there are ways to keep them involved, but the day-to-day technical decisions are very complicated, and the consequences, as you well know, are jeopardizing the benefits-the governmental benefits-that that incapacitated, or disabled person, may have otherwise coming to them. We don't want to jeopardize those benefits, the government specifically allows us to get those, and to preserve other assets in a special needs trust, and to do otherwise, to jeopardize those benefits and compromise the principle in that trust is a huge negative impact on people, so you want to be very careful about that.

Susan Graham: How do people select a corporate trustee? How would somebody decide to select the right corporate trustee for their family circumstances?

Tom Prohaska: I think the important thing is to interview the corporate trustee. I believe you need to go and talk to them, and see what they're like, see if they're somebody you can work with, see if they have a view that understands your need. I'd look to make sure they have local decision-making. One of the things that has happened with some of our large bank competitor friends is they've changed all the decision-making and moved it out of Boise to come centralized location. When people show a trend of doing that, where they do it now, they may do it in the future. I don't think most people want to have their beneficiaries dealing with somebody that may be there one day and gone next and not really have a commitment to this industry. And I think that's the other key thing, particularly when we talk about the biggest banks.

Susan Graham: What does it cost to hire a corporate trustee? People are concerned about hiring a corporate trustee because they think it's going to be expensive.

Tom Prohaska: There's a difference between providing investment services and providing trust services, which then include the investment with it. At Idaho Trust, for example, when we do investment management, we charge 1% of the assets under management. When we are a trustee or a personal representative of an estate, generally we charge 1.35%, so there's a small premium for acting as the fiduciary. Now, that's not in addition to investment management, that includes all the investment management. I guess what I say to the people that have the question about fees, Susan, is that I understand it, but I look at it slightly differently. What's the family cost if you have somebody executing or administering that trust who is a family member? They may have the expertise, or the time, or the availability. They're busy with their own life. What is the family cost if they make poor investment decisions? What is the family cost if there is conflict in the family? It doesn't have to reach full-blown litigation, but just negativity, or disagreements that arise. What is the family cost there? I think, when you look at all those, frankly the costs of not having a corporate trustee, typically, are going to be greater than the costs of having the corporate trustee. Additionally, my observation is, when there are investment assets to manage, that generally the investment performance will be greater than the cost of the fee than if just an individual did it. So, usually that corporate trustee is going to make it up in the performance in addition to all those other, less tangible, costs that families may pay to have an individual family member act.

Susan Graham: If you have unusual assets, such as a business or a farm or a ranch to operate for any length of time, how do you do that?

Tom Prohaska: Corporate trustees have to face that issue all the time. We have people on staff that have experience and expertise in doing that. To the extent that we need to hire outside people, we do that. But business continuity, management of real estate, is something that corporate trustees deal a lot with and we certainly have that experience, and any corporate trustee does.

Susan Graham: Do you have the ability to deal with a timber sale or cattle?

Tom Prohaska: Absolutely. I think the hardest one is the case where-not only those things where you're dealing with animals where, obviously, you've got something immediately that you've got to take care of-but it's generally just the idea of preserving the business value by keeping it going until you can get it sold. And that's really critical, and that requires you to step in promptly and take action to keep that business value high to preserve that asset for the family benefit.

Susan Graham: If someone dies and you've been named the trustee then, even in a situation that didn't have those unusual assets, you take some steps to go and secure the home and secure the other property?

Tom Prohaska: As soon as we're notified, we start marshalling assets the same day. Whether it's to go and secure the home, or to secure assets that may be livestock or a business, we take action the same day that we hear about it.

Susan Graham: Great. Is there something else that I should have asked you about in terms of the advantages or when to use a corporate trustee that we haven't talked about?

Tom Prohaska: I think that's pretty much it. I understand that people generally are going to have a preference toward individual family members. I think that folks need to ask the questions about that individual family member. Are they really going to be able to accomplish all the goals and objectives? Do they have an understanding of the legal and regulatory environment in which they are acting? Is there a safety net in case they don't do something correctly? We always assume that whomever we put in that situation is always going to do everything right, but if they don't, what's the safety net? Where's the insurance, or a bond? Usually there isn't any. Lastly, I would point out, I think sometimes we think we're doing people a favor, it's some honor to put them in charge, and I would just tell you, having talked to hundreds of these people that have been put in that situation, while they are very willing to act if they can, it's not an honor to be put in charge. It's a tremendous responsibility, a tremendous divergence from their normal lives and the things that they really have to concentrate on on a daily basis, and you're not conferring some kind of big honor on people by putting them in charge.

Susan Graham: If somebody wants to contact you, or other people from your bank, to explore the use of a corporate trustee to help their family, how are they going to reach you?

Tom Prohaska: Have them call me directly, again my name is Tom Prohaska at Idaho Trust National Bank, we can be reached-any of our trust officers can be reached-at (208) 373-6500. I'd also recommend that they go to our website which is http://www.idahotrust.com/. We've got a very expansive website, a lot of good information, and we have some key things to consider there when you're checking on a corporate trustee as far as deciding to use somebody or not. A checklist, if you will, of all the things we've talked about here today.

Susan Graham: Thank you, Tom, for sharing this information with all of us today.