Understanding the Costs of Maintaining a Trust

A personal trust allows individuals to safeguard their assets by transferring ownership to a separate legal entity, while still potentially retaining the ability to use the assets. This can protect assets, streamline their distribution, address complex tax issues, and help with challenging family dynamics. By understanding the costs of maintaining a trust, you can assess the feasibility and value for your long-term goals.

This article outlines the various cost of a trust from initial setup to ongoing expenses. It will help you determine whether to establish a trust and, crucially, who to hire as trustee.

Establishing A Trust: The Basics

A trust can serve many purposes, depending on an individual’s financial situation, family circumstances, and long-term goals. Trusts are particularly beneficial for those who face the following estate planning scenarios:

• Unique tax considerations
• Complicated family dynamics
• Children or heirs with special needs
• Desire to avoid probate, which is the legal process of administering an estate after someone dies

Before you can begin understanding the costs of maintaining a trust it is important to understand the different categories of trusts available. These include revocable living trusts, irrevocable trusts, charitable trusts, and special needs trusts, among others. Each type has its own advantages and drawbacks, and the costs of maintaining them may vary based on their complexity and purpose. To learn more about different types of trusts, read What Is a Legal Trust? Common Purposes, Types, and Structures.

If you’re specifically interested in a trust to provide for individuals who have disabilities, read our recent blog - Why and How to Use a Special Needs Trust.

A Grantor’s Most Important Decision: Selecting the Right Trustee

The trustee is responsible for overseeing the trust’s assets, making distributions to beneficiaries, filing necessary tax documents, and ensuring compliance with the terms of the trust. If the trust is complex or involves significant assets, the trustee’s duties may be time-consuming and intricate.

The grantor of a trust is faced with many decisions but none more important than who to name as trustee. Typically, this comes down to a decision between a corporate or individual trustee:

1. Corporate Trustees are professional institutions like banks, trust companies or law firms with experience and expertise in this capacity.
2. Individual Trustees are typically a family member or trusted friend with whom you have a close relationship.

When deciding between hiring a corporate or individual trustee, consider the following factors:

You can learn more about Hancock Whitney’s extensive experience working with wealthy families and estate planning here - Legacy & Estates | Hancock Whitney Bank.

Trust and Investment Management Costs

When it comes to understanding the costs of maintaining a trust, it is crucial to be aware of how corporate and individual trustees are paid for their services.

Corporate Trustees: Banks or trust companies often serve as corporate trustee and, as part of this work, assume responsibility for the management of trust assets by hiring and monitoring an investment manager. The investment manager may be affiliated or unaffiliated with the bank or trust company.

These costs are typically based on an investment management fee calculated on the value of the trust assets. 1% of assets is a good estimate, with a range from 0.5% to 1.5% with larger trusts typically paying lower, asset-based fees.

In some cases, corporate trustees may also charge hourly fees for specific tasks, such as preparing tax filings, providing legal advice, or managing complex investments. However, many corporate trustees may not charge extra for these tasks so the only ongoing cost to the trust is for investment management services.

Individual Trustees: Friends of family members serving as trustees may choose to charge for their services. Often, individual trustees will charge a nominal fee at most as a gesture of goodwill, depending upon the relationship with the grantor of the trust. However, the time commitment and responsibility may result in an individual trustee charging some fee, which could be asset-based, hourly or a flat fee.

Some states have laws or guidelines for trustee fees, especially for non-professional trustees. For instance, some jurisdictions might set limits on the amount that can be charged or provide general guidelines.

Whether or not an individual trustee charges a fee, the trust will still pay a fee for an investment manager who will oversee assets in the trust. As above, these fees are typically asset-based and can be estimated at 1% with a range from 0.5% to 1.5%.

The bottom line is that there may be little, if any, difference in costs between a corporate vs. individual trustee. That means the selection of a trustee should be based on whether they are qualified rather than on costs alone.

Additional Costs

In addition to the trustee and investment management costs outlined above, other costs of maintaining a trust do not generally vary based on whether a grantor selects a corporate vs. an individual. These fees can include any of the following:

Legal costs: The cost for an attorney to draft a trust document vary depending on factors like the complexity of the trust, the attorney's experience, and geographic location. Drafting a simple trust like a revocable living trust typically range from $1,000 to $3,000. More complex trusts like an irrevocable trust, special needs trust, or charitable trust can range from $3,000 to $5,000 or more.

Trusts often require ongoing legal guidance to ensure they comply with both state and federal laws. Changes in tax laws, estate laws, or the beneficiaries' circumstances can necessitate legal adjustments to the trust. Legal fees can vary depending on the complexity of the trust and the jurisdiction in which it is administered.

• Trust Updates: Over time, families may need to amend or restate their trust to reflect changes in family dynamics, financial situations, or tax laws. Legal fees reflect an attorney’s hourly fees and vary from a few hundred to several thousand dollars depending on the complexity of the revisions.
• Tax Compliance: Trusts are subject to specific tax requirements, and professional advice may be needed to ensure that all taxes are filed correctly. The trust may need to file its own tax return and ensure that any income generated by the trust is properly reported. The cost of tax preparation services can range from a few hundred to several thousand dollars per year, depending on the trust’s size and complexity.

Administrative Costs: Trusts can incur administrative costs related to managing the trust’s assets:

• Record-Keeping: Trusts must maintain detailed records of all transactions, including investments, income, and distributions. Hiring staff or engaging a service to handle record-keeping can add to the costs.
• Property Maintenance: If the trust holds real estate, the costs of maintaining and managing these properties must be covered by the trust. These costs can be substantial, especially if the trust holds multiple or high-value properties.

Tax Costs: Trusts are generally required to file their own tax returns and may be subject to both income and estate taxes. Here are potential tax costs to consider:

• Income Tax: A trust may generate income through interest, dividends, or capital gains. If the trust is revocable, the income is usually taxed to the grantor, but if it is irrevocable, the trust itself may be subject to taxation. Irrevocable trusts reach the highest tax bracket at lower income levels than individuals, so the tax burden can be substantial.
• Estate Tax: Depending on the type of trust and value of the decedent's estate, it may be subject to estate taxes upon the death of the grantor. The specific estate tax costs will depend on the size of the estate and current tax laws.
• Generation-Skipping Transfer Tax: If a trust is designed to pass assets to grandchildren or other beneficiaries who are more than one generation removed, it may be subject to generation-skipping transfer (GST) taxes. These taxes are additional and can significantly affect the distribution of assets.

Miscellaneous Costs:

• Bonding Fees: In some cases, an individual trustee may need to be bonded to ensure they are fulfilling their fiduciary duties. Bonding fees are generally a percentage of the value of the trust.
• Court Costs: While trusts generally avoid probate, there may be instances where the trust is challenged in court or needs to be administered through the court system. In these cases, court costs, including filing fees and legal representation, could add to the overall expense.
• Trustee Succession Planning: It is wise to plan for the possibility that the initial trustee may not be able to continue serving, whether due to death, incapacity, or resignation. Preparing a succession plan can involve legal fees and administrative costs.

How Hancock Whitney Wealth Management can help

As you have learned from this article, understanding the costs of maintaining a trust is crucial to making smart decisions to help secure your family’s legacy for future generations. We recommend you work closely with experienced professionals, including a trusted financial advisory team, estate planning attorneys, and tax advisors. This will help you better understand why to establish a trust, how to make key decisions around the selection of a trustee and be prepared for the associated costs.

Hancock Whitney builds lasting relationships with our clients with an approach rooted in responsive service, personal attention, and taking the time to truly understand your goals. As a trustee for almost 100 years, Hancock Whitney has the knowledge and experience to ensure all actions within trust accounts are taken in accordance with the terms specified by the governing trust documents and in compliance with all applicable laws. Reach out to us today.

The information, views, opinions, and positions expressed by the author(s), presenter(s), and/or presented in the article are those of the author or individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Hancock Whitney Bank. Hancock Whitney makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented. 

This information is general in nature and is provided for educational purposes only. Information provided and statements made should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Hancock Whitney Bank encourages you to consult a professional for advice applicable to your specific situation. 

Hancock Whitney Bank offers investment products, which may include asset management accounts, as part of its Wealth Management Services. Hancock Whitney Bank is a wholly owned subsidiary of Hancock Whitney Corporation.

Investment and Insurance Products:

NO BANK GUARANTEE │ NOT A DEPOSIT │ MAY LOSE VALUE │ NOT FDIC INSURED │ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY

Hancock Whitney Bank, Member FDIC. All loans and accounts subject to credit approval. Terms and conditions apply.