Typically, your trust will cost you around 0.5% - 2% of your total assets worth in yearly maintenance costs. That could be thousands each year, depending on how big your trust is.
Trusts can be costly when you include trustee fees, the type of trust you choose, and ongoing maintenance costs. But you can minimize those costs if you cleverly set it up.
That's why we’re going to spend some time here exploring the factors that directly impact the cost of maintaining a trust. We’re also going to give you some strategies to minimize these expenses. It’s an eye-opening topic, so, let's get right into the ins and outs of trust maintenance costs.
Understanding the Basics of a Trust
Do you know what you’re buying? Do you know what a trust is and how it helps you? Let’s first make sure that you’re up to speed on what a trust actually is.
In the simplest terms I can make it, a trust is like a bag. In this bag, you place things like real estate, art, money, and anything else worth something of value, and you safely tuck it away in there. In less simple terms, it’s a legal arrangement where you (the grantor) transfer your assets to another party, known as the trustee.
They manage your assets on your behalf. And then the trustee makes sure all your assets safely get passed down to your beneficiaries, and that the trust follows the terms outlined in your trust document.
Trusts are an age-old tool that’s been around for centuries, at least since Middle England, protecting assets and making sure they’re distributed according to the grantor's wishes. It’s a great way to pass down wealth, to protect against financial difficulties, and to protect your estate.
Definition of a Trust
You’ve probably heard of trusts in the context of their capabilities. Maybe you know of living trusts and family trusts.
Trusts can also be revocable or irrevocable, basically permanent or flexible. It all depends on your preferences and goals. Revocable trusts are flexible and can be amended or revoked during your lifetime. But they don’t have as much protection. But irrevocable trusts are more rigid and cannot be changed once established. And because they’re irrevocable, they’re very strong protection tools.
Additionally, trusts give you privacy for your assets, because they don’t go through the the probate process like wills. Anything in a will can be a matter of public record, like your assets, your name, your beneficiaries and so on. A trust keeps all that information private and safe. Also, by avoiding probate you skip the lengthy court process, all while keeping confidentiality.
Types of Trusts
Under that umbrella of trusts, you have different types of trusts. And each of them serves a different purpose. You may have heard about living trusts, testamentary trusts, charitable trusts, special needs trusts, and spendthrift trusts.
How do you decide which trust you need? And how do you know how much each trust costs to maintain? It all depends on what you want. Because each type of trust has a specific function. If you’re expecting a lot, your trust might cost more to maintain. On the other hand, if it’s a simple living trust, your costs might be quite low.
So, let's just look at living trusts for a minute here. You create them during your lifetime. It’s designed to help in managing your assets in case you become incapacitated. But compare that to a testamentary trust, which is created with your will after you die.
And compare that again to charitable trusts, which let you support your favorite causes with donations made from your assets.
Special needs trusts are designed to give much-needed long-term care to people with disabilities, and it doesn’t affect their eligibility for government benefits.
And lastly, we have spendthrift trusts which protect your beneficiaries from their creditors and themselves.
Factors Influencing the Cost of Maintaining a Trust
Ok, now that we have the same understanding of what a trust is and how it works, let’s talk money. How much is all this going to cost? Well, again, it’s a difficult question without a real straightforward answer. You have a lot of variables at work here. These variables could be the type of trust or how you’d like it to be managed.
Type of Trust
The first factor for the cost of trust maintenance is the type of trust you choose. As we covered earlier, different types of trusts are more complex than others. This is going to change how much it costs.
For example, let’s compare two options: the living trust and the charitable trust. A simple living trust is about as cheap as possible for maintenance costs. But a charitable trust is complex, with moving parts, investments, decisions, payouts, yearly fees, and more.
If you want to know the cost, you’re going to have to figure out what matters to you most. What are your specific goals and objectives? Do you want asset protection for future generations? Or are you more interested in using your trust to give money to charities? Once you know that, then you can calculate the overall cost of maintenance.
Trustee Fees
Did you know that you might have to pay your trustee? They’re a super important part of your trust, keeping everything compliant, legal, and done according to your wishes. And sometimes, depending on the terms of your trust document, your trustee might be entitled to get paid for their services.
How much do you pay your trustee for maintenance? Sometimes, it could be an annual percentage of the trust's assets. Or maybe it’s a simple hourly fee. Depends again on how complex the job is and how many assets they’re dealing with.
But let’s just make one thing clear. The trustee is crucial, absolutely crucial to the success of your trust. It’s just about the most important part of the whole process. You can’t skimp on choosing the right trustee.
You need to think about their level of expertise and experience. Yes, a professional trustee like banks or trust companies, may charge higher fees. But you’re getting the peace of mind of knowing that your assets are protected and secured for years.
On the other hand, you might have a family member or a close friend as your trustee, they could charge a lower fee. But is that person capable of performing all the tasks required of your trust maintenance? It’s your call.
Legal and Accounting Fees
I know we’ve been covering maintenance costs, but a trust has some other costs as well. For example, creating a trust and keeping it above board with all the legal requirements can add up. You could require legal and accounting services to make all this happen.
But what do these professionals do? Legal professionals help draft your trust document and make sure everything meets strict legal requirements. Accountants handle financial reporting, tax planning, and other financial complexities. Nothing is free, so you’ll have to pay for these services. Overall, this can add a lot to the overall cost of trust maintenance.
But again, you don’t want to get cheap here. If you want to get it done right, you want a professional to guide you through the whole process. Their expertise and experience will be tremendously valuable to the success of your trust. Speak with a few options to see which professional you’d need to have on your trust team, and to get the best value for the cost they’re likely to charge.
Average Costs of Trust Maintenance
So, overall, what will be the big line items on the maintenance costs of your trust? In other words, if you were to itemize a receipt, what are you paying for?
Initial Setup Costs
First, you’re going to have the costs to set it all up. First, you’re going to have the legal fees for drafting the trust document and choosing the right trust for your needs. Then, you’ll have accounting fees for financial planning.
Remember that this isn’t considering the ongoing reporting costs and filing fees. The total cost of setting up a trust will vary, depending on the complexity of your trust.
And did you know that transferring your assets into the trust could have a cost as well? This matters if you’re transferring assets where you have appraisals, title transfers, or other expenses. Make sure that you include those in your running tally of costs.
Annual Maintenance Costs
Now that you’ve established your trust, you’re going to get some ongoing maintenance bills. What do these costs look like? Typically, you’ll trustee fees, legal fees for reviews and updates, and accounting fees for tax planning and reporting. It all depends on your situation and goals.
There is one cost that often gets ignored or overlooked – investment costs. If you’re planning to use your trust's assets to make investments, you might have fees to pay. Broker fees, exchange fees, or other expenses can pop up from time to time.
Ways to Minimize Trust Maintenance Costs
Ok, it’s all sounding a little scary and expensive, right? I’m sorry to burst your bubble, but let’s repair some of the damage. You can take some steps to minimize your expenses. Trust maintenance costs are inevitable, but here are a few practical steps to keep costs down and your trust’s maintenance bill under control.
First off, every decision matters. From the trustee to the type of trust assets, each step will significantly impact your overall maintenance costs. Don’t rush through any decision so that you can save as much as possible at every chance you get.
Choosing the Right Trustee
We mentioned this before, but you can be smart about how you choose a trustee. You want to have a balance of expertise and price, experience and reliability. Most importantly, choose a trustee who understands your goals. It would be nice if they had a proven track record in managing trusts, but this is up to you. If you have a simple trust to manage, you might have more room to be picky about your trustee.
But remember to keep the lines of communication open. Talk with your trustee and ask how it’s all going. Find out what they’ve done, the investments they’ve made, and how they’ve been with reporting and filing. It’s a wise move to trust and then verify that everything is being done by the book.
Simplifying Trust Assets
Next, you have the costs of the trust's assets. Yes, these assets could affect your maintenance costs. It might be smart to simplify the trust by packaging your assets as one. This will cut down on your administrative fees. Talk with your lawyer about how to do this and keep your asset costs low. It will have the added effect of streamlining the trustee’s job too, so you could get double savings from this one simple move. Win-win.
You should also have regular reviews of the trust's performance. You might find those areas for improvement that will cut down costs again. Stay proactive and informed. And look for ways to make adjustments to improve your trust’s management costs.
The Financial Implications of Trust Maintenance
As you can now see, a trust will cost you something for maintenance. Whether it’s complex or simple, there will be some variables that you can play around with to cut down those costs. But besides the trust maintenance, you should also think about any financial implications beyond the yearly bills and fees. This applies to both the trust and its beneficiaries.
Tax Considerations
A trust is its own legal entity. This means that they have their own tax implications. Complying with tax laws could come at a price. Depending on the type of trust, you might find that any income your assets make could attract income taxes.
This will require planning and filing each year. There may also be gifting taxes, and transfer taxes when the assets are passed along to your beneficiaries.
And the tax laws are always changing and evolving. These changes might directly impact your trust’s performance. It’s best to speak with a tax expert so that you stay on top of all your tax obligations.
Impact on Beneficiaries
But you’re also going to have to think about your loved ones. All these trust maintenance costs might eat into the amount that your loved ones will get from your trust.
For example, if you have a special needs trust, and you’re counting on a certain amount going towards the long-term care of someone special to you, wouldn’t it be horrible to know that administration costs have cut into their care needs?
All this due diligence to cut down your trust’s costs isn’t just for your benefit. It’s so that your beneficiaries get everything owing to them without any penalties or taxes. You do the work now so they get the maximum benefit later.
Trust Maintenance Costs: One Last Thought
So, you want to build a trust. It’s a perfect way to safeguard your assets and protect your wealth and the future of your loved ones. But just like you would with any project, go into this process with your eyes wide open. Account for the ongoing maintenance costs so that you can reap all the benefits you’re after.
Because let’s be honest, what kind of price can you put on peace of mind? By the time you factor in all your costs, it’s far outweighed by the security and safety, knowing that you’ve created a lasting legacy that will go beyond you and last for generations.
