Guarding A Trust During A Financial Crisis

Money in a trust managed by a well-known Wall Street firm may evoke images of ultimate security, but it is just as vulnerable as any other investment. As financial titans topple, investors with assets in these trusts are sorting through what the changes mean for them. Knowing a few details can help.

Right now, there are two main worries. First, that the company managing the trust may be sold, declare bankruptcy or get embroiled in a government bailout. The second worry is the turbulent market. “You want to keep your eye on these things," said Robert H. Sitkoff, a trust
expert and professor at Harvard University.

The good news is that trust assets managed by a corporate fiduciary such as Merrill Lynch & Co. don't go on the company's balance sheet. So, if the company is acquired, in the case of Merrill Lynch -- or declares bankruptcy, as in the case of Lehman Brothers Holdings -- trust assets the company manages aren't in danger.

It is very important to monitor a merger or other big change at the corporate trustee. It could lead to "service changes on the ground," according to Sitkoff. For instance, if a merger results in the trust account being transferred to another manager, that person may be further away, less responsive or "simply less known to you," said Sitkoff.

It's common in a well-drafted trust to see a provision allowing the replacement of one independent corporate trustee with another. This is to make sure the trustee is responsive. An individual or family with money in trust may decide the bank it knew and trusted simply isn't there any more. At that point, the clause lets the family get proposals from several banks to see how they would manage the account.

As for the second big question -- how to handle the turbulent market -- individuals and families should talk with whoever manages the money in trust. The goal is to make sure he or she is doing his or her best to invest prudently.

Trust law requires that the investment manager diversify assets. Diversification, which spreads investments out into different securities, companies and industries, is intended to ease the effect of market ups and downs. It also prevents too much exposure to a single stock.

By Ed Coury, Senior Editor and Midwest Bureau Chief for the Wall Street Journal Radio Network, Dow Jones & Co., and a reporter for WWJ Newsradio 950.