Why Your Fund Manager Insists on Trustee Verification
As an investor, you may have experienced situations where your fund manager or investment sponsor required extensive documentation before allowing transfers of assets from one trust to a new trust with a different trustee. While this due diligence process may seem cumbersome, there are crucial reasons why sponsors must verify the legitimacy of new trustees through documentation. Let me explain what's at stake.
What a Sponsor Must Do
When assets are being transferred from an existing trust to a new trust, the sponsor has a fiduciary obligation to ensure the transfer is valid and authorized. This means verifying:
- The new trust's existence and terms through a certified trust agreement
- The new trustee's authority through certifications and legal opinions
- Compliance with procedures in the old trust agreement for transferring assets
- Any court orders allowing the transfer are properly followed
Collecting Documentation
To check all these boxes, the sponsor must collect and scrutinize several key documents, including:
- A certified copy of the new trust agreement
- Certifications identifying the new trustee(s) and their authority
- Tax ID numbers and W-9 forms for the new trust
- Investment management agreements confirming the trustee's control
- Authorized wiring instructions signed by the new trustee
- Indemnification protecting the sponsor from liability
- Documentation that the new trustee accepted the assets per the old trust terms
The Reasons Why
This may seem like a lot to ask, but there are critical reasons sponsors must go through this process:
- Validating Authority - To ensure distributions go to a legitimately authorized party
- Tax Compliance - To properly report and withhold taxes
- Liability Protection - To avoid allegations of improper transfers or breaches
- Dispute Prevention - To minimize risks of later ownership battles with beneficiaries
The Risks of Not Doing So
The consequences of skipping this due diligence can be severe. Sponsors open themselves up to liabilities including:
- Lack of legal authority over transferred assets
- Tax penalties for improper reporting/withholding
- Allegations of breach of fiduciary duty
- Costly litigation from disgruntled beneficiaries
- Potential court sanctions for violating orders
In essence, a relatively small amount of due diligence upfront protects the sponsor from potentially disastrous legal and financial risks down the road.
The Bottom Line
So while the documentation requests may seem tedious, they are a necessary safeguard. Your fund manager must verify new trustees through this process to uphold their fiduciary duties and protect your investment from liabilities. We appreciate your patience and understanding why these steps are crucial to protecting the interests of all involved.
