The historic origins of trusts stretch back a thousand years.2 Yet the role of the trustee — particularly the corporate trustee — seems to have changed more in the past two decades than in all its prior history. And many of these changes have diminished the traditional role of the corporate trustee. Certainly, the kinds of trusts that limit a trustee's role are useful in certain circumstances and can serve important family goals. But this diminished fiduciary scope has the potential to become pervasive, turning trustees into mere administrators. That could severely harm the trust industry. More important, a weakened industry will be less able to serve clients.

We fiduciaries must return to our roots. We should seek trustee engagements that require us to exercise strong, independent judgment, no matter how difficult the matter; go after cases that cry out for us to act as a principal advisor and mentor. In short, we should dare to follow the vision of Austin Wakeman Scott — perhaps the greatest scholar of trust law — who taught: “The whole responsibility for the management of the property is thrown upon the trustee.”3 If corporate trustees embrace this burden, they will do well by doing good.

Traditional corporate trustees are independent stewards, committed exponents and agents of the settlor's intent. They are strong, unbiased decision makers and judicious protectors of different, sometimes conflicting, beneficial interests. This trustee is a valued advisor, mentor and even surrogate family member.

But during the last decade or so, the fiscal imperatives of some states have sparked the imagination of lawyers, giving rise to new types of trusts: dynastic trusts (as states have repealed or substantially modified their rules against perpetuities); “tax haven” trusts (as states have repealed their fiduciary income tax statutes); and self-settled asset protection trusts (as states have purportedly extended creditor protection notwithstanding a settlor's retention of certain beneficial interests in the trust).

To comply with a particular state's regime, it generally is necessary that at least one trustee “reside” in that state. Because many or most clients will not know people residing in their state of choice, trust companies “resident” in the state have sprung up. Thus, the statutes produce exactly what they were intended to create: new, revenue-generating business for the states.

Although it need not be the case, usually the fiduciary powers of the corporate trustee serving under these new types of trusts are limited in some way. Trustees of asset protection, perpetuities or tax haven trusts in Alaska, South Dakota or Delaware often exercise only certain ministerial or custodial functions, but generally are not empowered to make investment decisions or discretionary determinations regarding the distribution of trust property. These trustees are not usually asked to deal with complex family needs, family conflict or other challenging issues calling for the exercise of expert judgment and discretion. Indeed, in many or most instances, they do not even have the power to do so.

Initiatives of the National Conference of Commissioners on Uniform State Laws also have facilitated the limitation of trustees' responsibilities. The 1994 Uniform Prudent Investor Act (UPIA) and the 2000 Uniform Trust Code (UTC) have wrought the most significant changes. The UPIA, now law in 40 states and the District of Columbia, lets trustees delegate their investment and management functions.4 The UTC, by ratifying the use of trust protectors and other advisors, lets the trustee's traditional authority be sliced up and doled out in pieces to various entities and individuals.5 Only nine states have adopted the UTC,6 but it has been introduced in seven others.7 Some, such as South Dakota and Delaware, have enacted similar statutes.8

These trusts and the legislative developments are not necessarily bad, nor is it always a mistake for banks to pursue limited trustee engagements. Such trusts and legislative initiatives can and often do serve important goals — including greater family control. And these engagements can be lucrative. Just witness the number of banks, traditional and private trust companies, brokerage firms, insurance companies, asset management companies and pension funds getting into the wealth management business. New associations have sprung up and blossomed, including the Brokerage Affiliated Trust Association and the Association for Independent Trust Companies.9

But beware what else grows from this seed. Jerome J. Curtis, Jr., professor of law at the McGeorge School of Law, University of the Pacific, in Sacramento, Calif., warned back in 1996 that the trend toward increasing delegation diminishes the protections afforded trust property and fundamentally changes the relationships among the trustee, the beneficiary and third parties.10 The trust industry also risks creating a perception that corporate trustees really want or can handle only limited assignments. It's easy for the public to draw such conclusions, given that the only thing asset protection, perpetuities or tax haven trusts have in common is to whittle down the traditional functions of the corporate trustee.

What an ironic, self-fulfilling prophecy: If the public came to believe this is all corporate trustees can handle, limited engagements would be all they'd be given. There are signs that, to some extent, this is already happening. While market data is not plentiful, what there is seems to support our concern. The Federal Depository Insurance Corporation reports for the years 1990 through 1999 reveal the following:

  • The number of discretionary accounts of all types (those in which the fiduciary has investment authority) have remained essentially unchanged,11 while the number of non-discretionary accounts grew by over 360 percent;12

  • With discretionary accounts, the number of personal trusts has remained essentially unchanged;13 the number of estate accounts has declined by 38 percent;14 and the number of agency accounts has increased by 60 percent.15

The substantial increase in non-discretionary accounts suggests a diminution in fundamental trustee responsibilities, while the lack of growth in discretionary accounts of all types and, within that category, personal trusts, is troubling, given that it occurs during a period of extraordinary wealth creation.

IT'S JUST BUSINESS

The pressure to shrink the corporate trustee comes from other quarters as well. For one, most modern financial advisory institutions are seeking to obtain more of every client's assets to manage or supervise. In the past 10 years or so, many institutions have concluded that possessing trust powers is useful for getting and retaining assets.

When trust capability is principally a means to capture assets, the institutions themselves seek limited trust engagements. Often, they characterize their services as asset management in a “trust wrapper.” Faced with this new competition, as well as the perpetual battle for margin in a business that is rapidly commoditizing, traditional trustees have come under pressure to emulate this approach by shrinking their originally robust trust services to a more cost-effective, asset-generating “wrapper.”

Another, unintended threat to the robust trustee is the now prevalent client service model, which employs a so-called “relationship manager.” Most trust institutions now deliver services through a generalist who relies on several specialists, including the trust officer. This model may be the best way to deliver client services. But a danger lurks: Improperly implemented and without a strong fiduciary culture zealously committed to the client's best interests, this model can subordinate the specialist's independent fiduciary judgment to the generalist's business judgment.

Also, from a regulatory perspective, modern financial institutions operate in demanding, challenging times, with heightened sensitivity to matters of internal risk management. The necessary by-product of such an environment may be an understandable tendency to shy away from hard cases.

We fear a new profession is emerging, one that has as its primary focus asset gathering and aligned activities: custody and record keeping. Such a profession subordinates its fiduciary backbone to the priorities of the overall relationship, seeking to avoid conflict at all costs.

Indeed, some leading trust companies are beginning to shy away from high-profile and difficult engagements — ones that may require the trustee to be a bulwark against feuding beneficiaries; to deal with complex matters of trust administration; to manage assets that present unusual difficulties; or otherwise to exercise substantial discretion, advice and mentoring under challenging circumstances.

In the last five years, we have seen several matters for which as many as 30 or 40 trust companies, both national and regional, were invited to participate in a trustee-selection process. After learning about the matter, all but a handful of corporate trustee candidates took themselves out of consideration.16 The cases involved difficult family situations and imminent or ongoing litigation. Most corporate trustee candidates were interested in being considered only if they would be a consensus-candidate.

We are not alone in our concerns. Ian A. Marsh of Withers, London, recently claimed that too many trustees are in the business for the wrong reason: to acquire assets under management.17 Marsh noted that “the best-rewarded trustees have always been those prepared to do the hard job: Spend time getting to know the family's needs, help achieve their objectives and do so with independence and an ability to stand their ground when necessary.”18 Noting that such trustees are not always popular with certain family members, Marsh nevertheless pointed to a client who said of his trustee “he is ‘the string on our balloon.’”19 This trend caused Marsh to ask: “[W]here does this approach leave those who need trustees to provide continuity and support in managing families through the generations, to mediate between the differing expectations of the current generation and the next, as well as between the competing claims of siblings and, in time, cousins, to the family fortune?”20 We agree that these questions need to be asked.

It may be a mistake to generalize too much from individual professional experience. But if what we have seen accurately reflects the trends, it's legitimate to fear a permanently diminished role for the corporate trustee and the industry. We worry that if trust companies increasingly recoil from difficult cases, they will be forced to conclude, as a business matter, that it makes sense to invest less in talented, experienced trust officers. And if profits dwindle (because trust companies are required to reduce fees in engagements when their responsibilities are limited or because they are not taking on the difficult matters that sometimes create opportunity for more lucrative fee arrangements), it may come to pass that trust companies will be able only to afford less talented personnel. Corporate trustees may cease to be the strings on clients' balloons. This cannot be good for the industry or its clients.

But there is another way.

BE BRAVE AND PROSPER

We urge trustees to have courage. There is great merit to business plans that aggressively seek high-profile, complex and difficult engagements. We also offer five reasons why this makes sense:

  1. It's needed: Clients, particularly those dealing with complex family situations, need strong, independent, sophisticated trustees. Individuals often cannot or will not discharge these responsibilities. Clients need a healthy, thriving corporate trust industry to help them deal with their challenges and problems.

    Although many years of relationships with trustees that have not fulfilled their responsibility may have resulted in clients perceiving less need for this service, our experience tells us that “if you build it, they will come.” We've seen that, when offered seasoned advice and counsel from the unique perspective of a qualified trustee, clients respond enthusiastically. A profound need for beneficiary advice and mentoring is lurking only slightly below the surface.

  2. Clients will pay: When priced carefully and chosen wisely, such matters can be remunerative. Obviously, the corporate fiduciary must give careful thought to the commitment of time, personnel and special expertise such matters require — and price services accordingly. This exercise also will require assessing what kinds of outside professionals, if any, need to be retained and how they will be compensated. Of course, risk management and loss contingencies will require special consideration. But these matters can be addressed, and lucrative, successful engagements can be secured.

  3. It builds expertise: These matters have the potential to increase an institution's intellectual and associational capital. The automotive industry provides a useful analogy. Many of the major car manufacturers invest significant amounts of money each year in automobile racing. They don't do this because most of their customers drive racing cars. But the lessons learned from racing can be applied to the building and refinement of the passenger cars (and trucks) that their customers do drive. Also, their customers get a vicarious thrill from driving a car that in some attenuated way resembles a machine hurtling around a track at 200 miles an hour.

    Similarly, a corporate trustee that repeatedly takes on the hard cases invariably increases its intellectual capital: the ability of its people to think creatively, act efficiently, and make and defend difficult decisions. Just as the majority of cars Ford, Chevrolet or Pontiac sells are not racing cars, the lessons learned in hard cases can be translated or scaled for those simpler matters that make up the majority of the trust company's business.

    The institution also gains stature by fostering the perception among clients that it is capable of managing any case, no matter how challenging.

  4. It creates awareness. Difficult cases often are high-profile cases that get a lot of media attention. What a great way for the industry to highlight the critical role it can play in complex family matters.

  5. It's tradition. Even after 1,000-plus years trusts, remain a vital wealth-management tool, in part because they're flexible enough to adapt to changing times. But, despite this mutability, the traditional form of the trust — with its millenium-long track record — remains valuable. We should recognize and fight to preserve that traditional construct.

These views may be controversial. If so, we hope they spark a dialogue that leaves the industry healthier and stronger.

— The authors wish to thank Robert B. Seaberg of Smith Barney for his comments and suggestions, and Lisa Rainforth of Citigroup Trust for her research assistance.

— The opinions expressed in this article are the personal opinions of the authors and may differ from opinions expressed by other departments, divisions or affiliates of Citigroup, Inc.

Endnotes

  1. Smith Barney is a division of Citigroup Global Markets, Inc.

  2. The modern trust emerged from the common law use, whereby feudal landowners, before the enactment of the Statute of Wills, would transfer legal title to third parties to avoid the feudal incidents that otherwise would be imposed if they retained the property or control from the grave. Thus, A would transfer property to B, directing B to allow A to use the property during A's life, and at A's death, to transfer the property to whomever A designated. In this way, A would part with legal title and avoid the feudal incident of wardship that otherwise would apply if he died with a minor heir. Upon A's death, the Chancellor would direct B to transfer seisin to A's designee. The Statute of Uses, enacted in 1536, sought to negate the effectiveness of the use as a way of avoiding feudal dues by transforming A's equitable title into the legal title for all purposes: the cestui qui use becomes the legal owner and is invested with seisin. Theodore F.T. Plucknett, A Concise History of the Common Law 575-87 (1956).

    The Statute of Uses would operate wherever B was seised to the use, confidence or trust of A, irrespective of the precise language employed. Nevertheless, a convention arose soon after the enactment of the Statute of Uses, pursuant to which the word “use” was reserved for relationships falling within the Statute, while the word “trust” was used for those falling outside its ambit. Ibid. at 598. By the 17th century, the modern trust, managed by an active trustee, had largely supplanted the passive trust as a response to mercantilism, the emergence of the Industrial Revolution, the development of securities markets and the increasing emphasis on the accumulation of wealth. See Jerome J. Curtis, Jr., “The Transmogrification of the American Trust,” 31Real Property, Probate and Trust Journal 251, 256 (Summer 1996).

  3. Austin Wakeman Scott, The Law of Trusts, Section 1 (4th ed. 2001).

  4. Uniform Prudent Investor Act Section 9 (a) (1994), www.law.upenn.edu/bll/ulc/ulc_frame.htm.

  5. Uniform Trust Code Section 808 (b) ? (d) (2000, amended 2001),www.law.upenn.edu/bll/ulc/ulc_frame.htm.

  6. www.nccusl.org/nccusl/uniformact_factsheets/uniformacts-fs-utc2000.asp

  7. www.nccusl.org/nccusl/LegByAct.pdf

  8. See, S.D. Codified Laws Section 55-1B-6 and Del. Code. Title 12, Section 3570, respectively.

  9. See also, Anne Field, “Mad Dash to Snag Wealthy Clients,” Trusts & Estates, 53 (April 2004).

  10. Jerome J. Curtis, Jr., “The Transmogrification of the American Trust,” 31 Real Property, Probate and Trust Journal 251 (Summer 1996). But see, Charles M. Bennett, “When the Fiduciary's Agent Errs — Who Pays the Bill — Fiduciary, Agent or Beneficiary,” 28 Real Property, Probate and Trust Journal 429 (Fall 1993) (arguing generally that fiduciaries should delegate as much as possible, as an effective way of reducing their liability).

  11. TrustUS 2000 CD-ROM, version 1.0 (Trust Resource Co.).

  12. Ibid.

  13. Ibid.

  14. Ibid.

  15. Ibid.

  16. In fairness, in one such matter there were questions as to how lucrative the engagement might be. At the same time, one corporate trustee candidate, who aggressively sought the business, proposed a novel but well-reasoned fee structure that likely would have been quite lucrative.

  17. Ian A. Marsh, “Trustees for the Wrong Reasons,” Trusts & Estates, 72 (May 2003).

  18. Ibid.

  19. Ibid.

  20. Ibid.