Estate Planning and Probate Section MCLE Program Webinar

June 24, 2020

2:00 PM – 3:00 PM Welcome/Announcements and Introduction Angela Iaria – Estate Planning & Probate Section Vice Chair

Program – A Good Friend to Have: The Benefits of Working with Professional Fiduciaries

Speaker William E. Hardesty, Arboretum Wealth & Trust Management

Speaker’s Bio – see attached

Presentation Summary This program will provide attendees with a broad understanding of the role professional fiduciaries play in the estate planning process, how professional trustees make account acceptance decisions, how the fees work, the benefits of professional handling of investments, spotlight the special fiduciary training the professionals undergo and why it is important and beneficial to utilize the services of professional fiduciaries.

Link to Evaluation The evaluation must be completed in order to receive CLE credit. https://www.surveymonkey.com/r/EstatePlanning06242020

Next Meeting: September 23, 2020

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William Hardesty, J.D. began his career in fiduciary financial services in 2000. He joined

GreatBanc Trust Company in 2015 and helped launch Arboretum Wealth & Trust

Management. Prior to joining GreatBanc Trust Company, Mr. Hardesty served as Trust

Officer for BankFinancial F.S.B. He earned a Bachelor of Science degree from Southern Illinois

University and his Juris Doctor from the Northern Illinois University and was admitted to

practice in 2000. He is a Certified Illinois Child Advocate in the 13th Illinois Judicial Circuit.

Mr. Hardesty is a graduate of Cannon Financial Institute Investment Management School and

is a Center for Fiduciary Studies Accredited Fiduciary Investment Manager™.

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William E. Hardesty, J.D.

Arboretum Wealth & Trust Management

1. Learn the benefits of working with professional fiduciaries

2. Gain knowledge of common fee structures

3. Understand how professional fiduciaries invest assets

4. Learn how professional fiduciaries decide to accept appointment

5. Common client objections

GOALS:

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Benefits of working with a pro:� Drafting stage (Will review with administration eyes)

� One Stop Shop (From investments…to well past client’s death)

� Legwork (Probate estates)

� Asset gathering/re-titling/funding of the trust (All grantors seek help/ many fail to complete this step)

� Drafting attorney retention for future work (Estate settlement/litigation)

� Attorney referrals/networking for you (COI for Attorneys)

� Sources of CLE credits (Saves you money on teleconferences and invitations to CLE)

� Value added for clients (Another arrow in your quiver, round-table approach, storage of docs benefit)

� Aid in contested and complex matters (Put the weight on us)

� Professional level communication (Often staffed with attorney, tax pros, investment pros)

� Shield from difficult beneficiaries (Be mad at us, not each other or your attorney)

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� Efficiency

� Responsive

� Record keeping (Guardian of the estate)

� Peace of mind (The go-to)

� Adds to lawyer agility (Different issues require different professionals)

� Connections to professionals in other fields (Forensic accountants/asset managers/care givers)

� Good practice (Clients should know about professional fiduciaries as an option)

� Pay you promptly

� Implementation of your drafting work…correctly

� Collaboration (Have you seen or dealt with this issue before?/what do you like to see in the language?)

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Trustee responsibilities: � Safeguarding and distributing assets

� Keeping records

� Managing investments

� Filing and paying taxes

� Maintaining and selling real estate

� Overseeing business interests

� Managing liquidity needs

Trustee responsibilities: � Gathering and preserving artwork, jewelry and other collectibles

� Resolving beneficiary disputes

� Defending and pursuing legal claims

� Paying expenses

� Communicating with CPAs, attorneys, insurance agents and other professionals

� Accounting to beneficiaries

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Qualities and skills to look for in a trustee: � Willingness

� Competence

� Objectivity

� Financial experience

� Discretion

� Patience and attention to detail

� Longevity

� Conflict resolution

� Open communication

� Reasonable Fees/Investment costs/no proprietary funds

Regulation of Professional Fiduciaries O.C.C. Reg 12 C.F.R. section 9

� § 9.3 Approval requirements.� § 9.4 Administration of fiduciary powers.� § 9.5 Policies and procedures.� § 9.6 Review of fiduciary accounts.� § 9.7 Multi-state fiduciary operations.� § 9.8 Recordkeeping.� § 9.9 Audit of fiduciary activities.� § 9.10 Fiduciary funds awaiting investment or distribution.� § 9.11 Investment of fiduciary funds.

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Regulation of Professional Fiduciaries O.C.C. Reg 12 C.F.R. section 9

� § 9.12 Self-dealing and conflicts of interest.

� § 9.13 Custody of fiduciary assets.

� § 9.14 Deposit of securities with state authorities.

� § 9.15 Fiduciary compensation.

� § 9.16 Receivership or voluntary liquidation of bank.

� § 9.17 Surrender or revocation of fiduciary powers.

� § 9.18 Collective investment funds.

� § 9.20 Transfer agents.

The Fees

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Assets Under Management Fee (1%- 1.50% of AUM)

Commonly applied to trustee, guardian, investment management and custody services

� Annual fee, usually charged in monthly installments.

� Calculated by a fixed percentage of the total market value of the assets the fiduciary.

� Commonly “tiered” based on AUM. Percentage charged to the account declines as “breakpoints” are met. Example of our fee trust services fee schedule:

First 250K of AUM - 1.25%

Next 750K of AUM - .90%

Balance - .65%

Acceptance Fee:

�Commonly a fixed fee or hourly fee charged to pay for efforts of transferring assets, opening paperwork, system set-up, compliance work.

Minimum Fee:

�Absolute minimum the fiduciary will charge for services. Varies greatly in the industry.

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Extraordinary Fee:

�Hourly or fixed fee for services requiring uncommon efforts, monitoring, or expertise. (Mineral rights, farm management, difficult beneficiaries)

Termination Fee:

�Fixed or hourly fee for efforts required to close the account, distribute assets, obtain receipts and releases.

Fiduciary Investing

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Typical Investment Approaches/Services:

Outside Investment Company as Advisor to Fiduciary

• Services are paid for by the account or by the fiduciary• Sometimes paid with the 12-b 1 fees from the investments the

advisor picks (beware of expensive funds often chosen)• Usually uses “model portfolios”• May or may not advise on individual stocks• Due diligence oversight of the advisor is still required of the

fiduciary and investment approvals go through the fiduciary committee

In-house Investment Services

• Fiduciary team’s Investment Officer provides the investment services

More closely involved with individual accounts and beneficiary needs and goals.

Paid by fiduciary fees as part of fiduciary fee schedule (no double fees)or

• A team of investment professionals somewhere within the company, but not on the fiduciary team, provide standard investment guidance and research to the team and direct allocation models

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Investment Reviews:

• Done at least annually• Full fiduciary committee (required) involved for approval• Investment policy statement is approved• Investment objective is approved• Investment turnover is reviewed to look for “churning”

Caveats:

• The use of expensive mutual funds erodes the returns of the beneficiary

• Check the “all-in” expense of investing with the fiduciary• Portfolios of mutual funds can cost 1% of assets or more on

top of the fee paid to the fiduciary. That means that the fiduciary is charging 1% and the investments cost the portfolio another 1% or more

• Look for proprietary funds that benefit the fiduciary

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To Accept Or Not To Accept…

You will find that some professional fiduciaries will not accept a trusteeship, executorship, or provide some services because they have determined that certain assets or other factors are outside of their expertise, will require too much effort, or do not fit the business model they are using to manage business profitability.

Some common examples are:

Real Estate

Some professional fiduciaries will not accept trusts/estates owning real estate.

� Hassle� Risk (EPA, Fire, Flood, etc.)

� Bills

� Taxes

� Upkeep

� Visits

� Appraisals/inspections (3yr/Annual)

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Family Businesses/FLPs

Some fiduciaries will not serve as fiduciary for trusts that own family businesses or family limited partnerships as an asset.� Due Diligence/Risk� Voting� Family Ownership/Fights� Documentation� Reporting� Terrible recordkeeping

Closely Held Stocks/LPsSome professional fiduciaries will not accept accounts holding closely held business stocks or limited partnerships.

� Market Value Reporting/no market pricing

� Specialized Industries

� Specialized Legal Representation

� Special Asset Treatment/Due Diligence Testing

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Notes/Debt InstrumentsSome professional fiduciaries will not accept accounts holding notes or other debt instruments.

� Payment tracking

� Debt enforcement/Foreclosure on beneficiaries

� Extra audit attention/compliance hassle

� Often poorly created

Mineral/Oil/Gas RightsSome professional fiduciaries will not accept accounts holding mineral/oil/gas rights.

� Multi-layered ownership or management

� Lack of expertise

� Enforcement hassles/disputes

� Everchanging contracts

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Contested Estates/Guardianships/TrustsSome professional fiduciaries will not accept contested matters.

� Hassle

� Expenses to account

� Time/Court dates

� Document production

� Risk of uncertainty

� Risk to reputation

Active FarmsSome professional fiduciaries will not accept accounts holding farms or farmland.

� Usually needs a “Farm Manager”� Navigation of farming issues, crop and equipment insurance, business operations

� Specialized needs and due diligence

� Toxic chemicals

� Tenant farmer leases

� Cash rents

� USDA paperwork/filings

� Risk due to dangerous occupation

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Property Outside IllinoisSome professional fiduciaries will not accept accounts holding ex-Illinois property.

� Due-diligence/distance

� Differing governing laws

� Possible ancillary probate administration

� Real estate tax schedules

� Jurisdictional issues

Documents Not Governed By Illinois LawSome professional fiduciaries will not accept accounts not governed by Illinois law.

� Expertise/unfamiliar

� Enhanced due diligence

� Necessity for state-specific representation

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Distribution Only Trusts (Short Term Accounts)

Some professional fiduciaries will not accept accounts that are short-lived.

� No long-term fees

� All the work is up-front and on the back-end closing procedures (much work)

� Usually very little notice/time to work

� No relationship with the beneficiaries

Account Size (Assets Under Management)Some professional fiduciaries will not accept accounts under their minimum fee.

SIZE MATTERS!

� We are paid based on asset values!!!!!!!

� Most fiduciaries have a low-end limit on account market value accepted

� Vary greatly

� More money = Easier in most cases

� More money = Last longer

� Easier to allocate investments

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Special Needs TrustsSome professional fiduciaries will not accept special needs trusts.

� Unique beneficiary = unique problems

� Distribution standards are different

� Public benefit analysis is necessary

� Difficult spending decisions (will it violate the rules?)

� Older SNTs are not written well

Difficult Beneficiaries Some professional fiduciaries will not accept accounts with difficult beneficiaries.

� Time consuming (no compensation for it)

� Slow everything down

� Attention suckers

� Awful accusations

� Threat of lawsuits

� Violence

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Outside Investment DecisionsSome professional trustees will not partner with an outside investment adviser to manage trust assets or they will require trusts to use an investment adviser from their list, rather than your client’s preferred adviser.

� Paying twice for the services

� We usually custody the assets/fight for custody

� Due diligence required of outside advisor

� Slows things down

� May not agree with advice or moves made by advisor

� Poorly written delegation language

Co-Fiduciaries/Trust ProtectorsSome professionals will not serve as a co-fiduciary with individuals or accept any type of direction from any other party regarding duties which they believe must be handled by the professional, regardless of the terms of the instrument.

� Delays

� Too many cooks in the kitchen

� Onerous paperwork flying around

� Some act/some do not

� No expertise

� Poorly written delegation language

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Dealing With Common Client Objections

� REMEMBER: You do NOT need to “sell” the client on the professional fiduciary. The professional fiduciary will do that. All you have to do is advise clients of the benefits of using a professional and the downside appointing a non-professional

“My trustee will be able to keep family peace”

Serving as a trustee is a business relationship. Adding a business relationship to the personal family relationships can be a disaster:

� A trust’s investment portfolio does not appear to be properly allocated (too risky/not risky enough/returns are low)

� A piece of real property is sold to a related party (such as a trustee’s friend, relative or business contact)

� Pricing the real estate (too high/too low)

� Updating or fixing real estate (cost to inheritance)

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“My trustee will be able to keep family peace”

Disaster (cont’d)

� Spending inheritance on professional help of attorneys, accountants, etc. (I got a guy)

� Distributions do not seem fair and equitable (I don’t have kids!! Not my fault he didn’t work through college!)

� Administrative and distribution delays (You better have my money! What is taking soooo long!??!?)

� Failure to account to beneficiaries (You are keeping me in the dark!)

Sometimes, the only way for a beneficiary to protect her interests is to hire an attorney and, in some cases, file suit.

“Professional trustees/executors are expensive,

and my choice will serve for free”

Serving as a fiduciary is a source of potential liability:

� Beneficiaries can hold a fiduciary personally accountable if the fiduciary does not perform duties properly.

� All trustees/executors are entitled to receive “reasonable compensation” for their services.

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Compensation does not necessarily disappear when an individual is chosen:

�Even when an individual fiduciary is willing to waive the right to compensation, there are other “costs” to be considered. (a part-time job…at least)

There are sacrifices an individual must make, and often feels compelled to make, in order to find the time to perform their duties.

And…� There are also a variety of services an individual must outsource at

the expense of the estate or trust.

� An individual rarely has previous experience as a fiduciary orexpertise in handling the investment, record-keeping and generaladministration responsibilities involved in an estate or trustadministration.

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And…� Individuals do not have the benefit of in-house attorneys, portfolio

managers or other professionals that a professional fiduciary hason staff.

A family member intends to forgo compensation and dutifully fulfills her obligations as trustee for free. The individual then recognizes the level of work and sacrifice or runs into difficulties with personal finances, or a beneficiary starts questioning the fiduciary’s judgment or works to remove the fiduciary. Compensation suddenly becomes an issue.

Reasons To Advise Against an Individual:

�Lack of time

Individual trustees do not have the time to properly administer a trust for others. Also, life gets in the way. There are other things to do.

This is the same reason that we never have seen a grantor able to completely fund their trust on their own without professional assistance.

Professional trustees do this for a living, full-time, are set up to manage the property and finances for others and areare generally bonded and/or insured.

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�Lack of skillsIndividual trustees may be able to handle their own family finances just fine.

However, trusts rarely have the same assets as your trustee’s own assets.

Do they understand trusts and their legal duties and obligations?

Trusts and estates often have retirement accounts and other tax-deferred or tax-advantaged assets.

Do the trustees understand the state and federal tax ramifications of these assets, not only on the trust, but also on the trust beneficiaries?

Do they have experience managing the marketable securities, investment real estate or other assets of the trust? Professional trustees will either have the skills or will hire it out.

�Adverse effect on family relationships

When one child is appointed trustee before another, it can create animosity between them.

If they already are not getting along, this could just add fuel to the fire.

It is often difficult for family members to be objective, particularly where different beneficiaries have different and opposing interests or where emotional family relationships are involved.

There always seems to be family baggage.

You may have a one beneficiary who lacks money management skills. It seems really easy to name another child who has the money management skills to be the trustee over their sibling’s trust. If the beneficiary sibling did not already hate their trustee sibling, they will the very first time that they ask for money and the trustee sibling will not give it to them because they are following trust mandates.

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� Lack of documentation.Individual trustees very often do not have the tools necessary for accounting and reporting.

They don’t always understand that a trust must account separately for the funds available for income beneficiaries from those for the remainder beneficiaries.

Individual trustees regularly commingle trust funds with their own personal funds. They do not always make copies of all bills or all deposits.

Some regularly transfer funds between accounts making it difficult to track the funds or determine the source of the funds.

Lack of time, lack of skills, adverse effect on family relationships and lack of documentation ends up costing more than if a professional was used.

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Benefits Of Choosing The Professional Recap/Checklist:

� Professional Management - actions - investments - record-keeping - tax returns

� Continuity

� Objective Exercise of Discretion

� Avoiding Conflicts of Interest

� Insulation for the Individual Trustees

� Protection Against Misappropriation of Funds

� Professional Management - When a professional serves as trustee, people in that trust department manage the trust. Management of the trust is the full-time job of these professionals. It is not something they do when not working at their real full-time jobs; it is not something forced onto them by circumstances or reluctantly done from a sense of moral obligation. The trust officers are experienced in the requirements and appropriate procedures for administering a trust.

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� Professional Management (cont’d)� An individual trustee, no matter how knowledgeable, is generally an

"amateur" trustee. � The professional brings experience and knowledge in investments generally

and trust investments in particular. � Will the individual trustee know what investments are appropriate for a

trust? � Will the individual trustee understand the distinction between income for tax

purposes and income for trust purposes? � Will the individual trustee keep current on investments, taxes, the law of

trusts, etc.? � Will the individual trustee know how to keep appropriate records for the

trust?

� Continuity - Will the individual trustee be available to serve at the appropriate time and continue to be available during the entire term of the trust? If the trust is for the benefit of young children and is to last for many years, will the individual chosen be too old to serve as trustee?

� Are there enough individuals to name successor trustees in addition to the original trustees? If a professional is used as a trustee, although the particular individual trust officer may change from time to time, the "trustee" will always be there. § 9.16 Receivership or voluntary liquidation of bank.

And…

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� Objective Exercise of Discretion - It is often difficult to be objective, particularly where different beneficiaries have different and opposing interests or where emotional relationships are involved. The professional trust department deals with these types of decision every day. The decisions can still be difficult, but the professional is well-equipped to handle them. § 9.4 Administration of fiduciary powers.

And…

� Avoiding Conflicts of Interest - An individual trustee might have an inherent conflict of interest if he or she is also a potential beneficiary. The professional trustee would have no such conflict. § 9.12 Self-dealing and conflicts of

interest.

� Insulation for the Individual Trustees - Sometimes an individual trustee is placed in the difficult position of having to turn down the request of a beneficiary. This can be even more awkward when the trustee is also acting as the guardian of a minor beneficiary of the trust. Having the professional as co-trustee, takes some of the "heat" off the individual trustee.

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� Protection Against Misappropriation of Funds - Selecting a close relative is no guarantee of honesty. There are numerous examples of individual trustees who have stolen money. If a professional is named as fiduciary, the likelihood of misappropriation is reduced because of checks and balances in the administration of the trust.

� However, even if there is a dishonest trust officer, the professional - presumably a financially secure institution - will be standing behind its trust officer and make good any losses that result from the dishonesty. The end is near I promise!!!

Questions?

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Thank You For Listening!!

William E. Hardesty, J.D.

Arboretum Wealth & Trust Management

Whardesty@awtm.com630-310-1862

801 Warrenville Rd. Suite 500Lisle, IL 60532

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