What does a trust cost? You must consider both the initial charges for creating the structure and the subsequent ongoing expense of maintaining it. But the costs are not exorbitant. A lawyer can help build your trust for under $2,500, but the costs can rise quickly depending on your location and the complexities. Also, the administration, perhaps spread over decades, may add further expenses. It is absolutely appropriate to ask your bank or other organizational trustees for a detailed breakdown of their fees upfront before you commit.
The trust document bible
The trust document itself is the authority for designating key elements of the structure, most notably the duties of the trustees whose overarching mandate is to ensure that the wishes of the trust’s grantor (aka settlor or creator) are carried out. Trustees’ compensation is another important aspect spelled out in the same document.
Professional trustees or attorneys must earn their bread and butter. Still, sometimes a family member or close friend will agree to undertake trustee responsibilities for free, or a beneficiary might forgo payment in order to avoid income tax liabilities. For instance, if a surviving spouse would be the sole beneficiary, they would effectively be charging themselves if they were to levy a fee — and shooting themselves in the foot if they then paid tax on top!
It is an inherent feature that the grantor can impose just about any condition on the trust (as long as it does not contravene public policy or morality, like restricting marriage). The same freedom applies to fees, which can be stipulated to suit the settlor. Grantors should bear in mind that long-lasting trusts may eventually require successor trustees who might need attractive levels of compensation as motivation to serve.
There are two usual routes: Most trusts that contain more assets, especially those producing income, use a percentage model, typically averaging 1%-2%. Large multimillion-dollar trusts, and those managed by corporate trust companies, may cost as much as 3%-4%, again depending on the complexity of the structure and the experience of the trustees themselves.
Remember, trustee fees are paid out of the trust assets rather than directly by a grantor or executor. If you consider that, say, 2% of a $5 million trust soon mounts up to $10,000 a year, it is understandable that grantors may balk at a percentage structure destined to consume the trust assets so voraciously. Instead, many turn to a flat fee or even hourly rate, particularly where little active management is needed. The trust document can also cap fees at a limit or require different rates of successor trustees.
The document may also lay out reimbursement for trustees’ expenses, such as
- Travel — perhaps to meet beneficiaries.
- Filing fees.
- Courier/postage fees.
- Legal expenses.
When the trust document is silent
If the document gives no instructions, courts determine reasonable compensation for trustees. They are likely to follow the same rules as those for an executor of a will. With many court judgments available for precedent, some frequent parameters are:
- Gross value of assets.
- Gross income.
- Growth in the value of the investments.
- Number of transactions moving funds in and out of the trust.
- Time spent on trust duties.
- Exceptional skills or experience of the trustees.
- Estimates by trustees.
- Any extra work involved, like litigation or business transactions.
- State and local laws.
Cost of risk
Trustees may incorporate a risk premium when they calculate a fee schedule. There is a possible danger that something might go dramatically wrong and the adjustment is intended to cushion their exposure. Professional liability claims may arise from disappointed beneficiaries, e.g., trustees have unduly influenced distributions to certain beneficiaries, mismanaged funds or made poor investment decisions. Penalties for violating fiduciary standards can be severe.
If you are considering establishing a trust or wondering which trustees to employ, speak with a financial adviser or estate planning attorney.