In this blog I will briefly describe trust administration fees. You can control trustee fees around trust administration. Part of the answers centers on streamlining the trust document for trust administration. The other part rests on controlling how a trustee charges it's fees. You have the power to use a corporate trustee on your terms not theirs.
Trust Administration Fees - The Beneficiary and Grantor Dilemma
The old adage that the only two certain things in life are death and taxes still rings true today. Nowadays it seems we should adde “death, taxes, AND fees” because everywhere you turn consumers face fees. Do you remember when there were no subscription fees (i.e NetFlix, Spotify, iTunes, Pelton etc). We all feel that fees have crept into every section of our financial life. Often it is the same game when it comes to trust administration fees. The largest difference today for beneficiaries and the grantors rest on the choices and control around selecting a trustee. Today you have power to select a trustee that considers cost efficiency as natural as superior customer service.
Background on Bank Trust Companies
Going back a few hundred years the role of a bank trust company centered on stability and consistently for their clients. These trust departments existed with a bank. Do you remember your grandparents talking about their banker? The trust officer at the local bank department offered the same stability. The leaders of these bank trust companies respected and paid these trust officers very well. The consistency of their advice and counsel offered great services to families. Trust administration fees were discussed but matched the quality and quantity of trust services offered.
With the Douglas Amendment to the Bank Holding Company Act of 1956 and few court cases [see note 2] the banking system began to change. Over time banks had the ability to own banks across state lines. Pretty soon super regional banks began to pop up everywhere. And then the emergence of national banks became the norm. With these changes came the focus on revenue expansion and cost control. Part of the collateral damage came to bank trust departments. Decisions were no longer local and trust officers were no longer seen as critical parts of customer service. They were relegated to order takers and communicators. These began the challenge from you and I on trust administration fees.
Background on Trust Fees
Corporate trustees do not operate in the most efficient business manner. Over the last 500 years, corporate trustees did not have direct competition. Like any industry with no competition the incentive to remain innovative and competitive slowly erodes. That has changed. Today, corporate trustees face competition from independent and advisor friendly trust companies. Everyone can tell stories about the long laundry list of trust administration fees. They’re endless. A few examples:
- Termination fees;
- wire transfer fees;
- bill pay fees;
- special asset service fees;
- hourly rates;
- copy charges;
- valuation charges;
- tax preparation charges
- travel costs; and
- extra fees for returning a beneficiary’s phone call (just kidding).
These trust administration fees can add up quickly and sooner rather than later beneficiaries are left funding a mile long list of fees instead of enjoying the security provided by their trust. Finding solace within the protections of your trust becomes more difficult when paying unnecessary trust administration fees. Attempting to avoid these fees by handling the trust administration yourself or a family friend can lead to a separate set of potential bad outcomes. 1 The decision on whether to use a corporate trustee or a family friend as trustee does not have clear good or bad outcomes. The answer lies in the details and the topic around picking a trustee.
“Many traditional trust companies have termination fees, distribution fees, wire transfer fees, etcetera. We believe this occurs because they do not have an efficient process and are not selective in avoiding high maintenance trusts.”
Different Types of Trustee Services
Most corporate trustee services offer these basic types:
- Agency Trustee Services;
- Delegated or directed trust services;
- Irrevocable Life Insurance Trust services;
- Special Needs Trust services;
- Asset Protection Trust services; and
- Concierge trust services (can be included wrapped inside above services).
How does a beneficiary or grantor know what trust administration fees for these different services should be fair versus too much? It starts by understanding the basics of any trust administration fee - risk and time. Every trustee's focus rests on managing the amount of risk they assume as the trustee and the amount of time required to full fill their fiduciary trustee duties and responsibilities. Most trustees do not communicate via the internet the complete fee schedule. This holdover from the old days continues as the norm and not the exception. Researching who charges for what on trust services narrows the information gap.
Agency Trustee Services
Let's face many times a family wants an individual trustee (family member or friend) as the trustee. The roles and responsibilities of that trustee loom large for that person. Many corporate trustees offer a trustee service to individual trustees called Agency Trustee Services. The corporate trustee acts as an agent to the individual trustee. The individual trustee controls everything. Incurs all the risks. They use the corporate trustee for reporting and guidance. The trust administration fees for the corporate trustee rests on time and no risk.
A trust officer assigned to help the individual trustee on best practices for record keeping, distribution decisions and other nuisances around trust administration. Trust administration fees for agency trustee services remain very tight and affordable. A great solution for families wanting an individual trustee with oversight and guidance from a corporate trustee.
Directed or Delegated Trustee Services
Directed or delegated trustee services can fall under a corporate trustee or an individual trustee. Using the directed trustee service model, the trustee requirement that they reside in that state, falls under a mandatory fact. Trust administration fees for directed or delegated trustee services should revolve around the trustees risk and time.
Under a directed trust the trustee generally has less risk. The trust document requires to absolve the trustee of any investment decisions made by a third party financial advisor. The same can be said for distribution decisions but this requires a distribution committee or distribution trustee separate from the corporate trustee. The trust administration fees around risk and time should separate how beneficiaries exist, how many annual distributions, what the trust owns, how many trusts and of course the directed trust status of the trust.
Under a delegated trust the trustee shares the investment fiduciary risk with the financial advisor. Most trusts existing today fall under a delegated trust. The trustee makes the discretionary decisions to delegate the investment decisions to the financial advisor. The trust administration fees for a delegated trust are higher by about 10% to 20% that a directed trust all things held equal.
Irrevocable Life Insurance Trust services
The purpose of an irrevocable life insurance policy (known as an ILIT) provides for life insurance proceeds to not be included in someone's estate and to provide creditor/ex-spouse protection for future beneficiaries. The trust administration fee for an ILIT should range between $1,500 to $3,000 annually. The trustee, normally a corporate trustee, follows annual crummey notices and filings with payments of the annual life insurance premiums from the trust itself. Many individual trustees can perform this duty admirably how the process requires detail and consistent follow thru. Cutting corners, though may save money on trust administration fees, could cause the ILIT to be included the deceased estate and avoid one key goal of the ILIT.
Special Needs Trust services
These types of trusts come at very difficult times for any family. Their creation either during the grantor's lifetime or at their death requires very unique trust administration processes. Depending on the severity of the medical/health situation of the beneficiary, the trustee needs to follow the rules to ensure the federal aid does not get removed from bad processes. The trust administration fees for special needs trusts run higher than normal trusts due to the extra steps and processes. Normally, the trust administration fees run about 15% to 30% higher than normal published fees.
Asset Protection Trust services
Asset protection trusts (also known as self-settled trusts) are best used in a few states such as AK, DE, NH, NV, TN and SD. Everyone must remember they create a hurdle against lawsuits etc. THEY ARE NOT A GUARANTEE. The trust administration fee run about 10% to 20% higher than normal trusts as the trustee carries a higher degree of risk. If the trust becomes challenged by creditors and/or ex-spouses the trustee's time will increase dramatically dealing with lawyers and the like. Many states offer reasonably similar protections if one believes the hassle factor is the main issue of this type of trust.
Concierge trust services
Concierge trust services can be wrapped into some of the other trustee services listed above. Grantors and/or beneficiaries should be very detailed on the trust administration fees built into concierge trust services. Examples of these type of services are bill paying, managing homes, dealing with nursing care, and the like. Remember, any trustee service offered by a trustee will have a risk price component tied to it. This vastly differs from someone else who would charge based on their time only. The question for everyone needs to balance the trust administration fee with the risk controls versus the actual time involved without a corporate trustee.
Bottom line on Trust Administration Fees
As with any service we use knowing what we want to pay for becomes critical. All trust administration fees rest on the risk and time involved by the trustee. Knowing the type of trustee service you want and how to balance those fees become critical. Hopefully, this blog will make picking a trustee and the subsequent trust administration fee aligned to your wants and needs. At the very least, it will make these decisions much easier than picking toothpaste at your grocery store.