When I draft a trust for a client, which is often, one of the questions I frequently receive from a client is—How much will it cost me or my children to maintain the trust? From a practical standpoint, in most instances, the answer is very little.
A trust is a fiduciary relationship through which one person, the trustee, holds property for the benefit of another person, the beneficiary. The written terms of the trust—the words that tell the trustee when and how to distribute the assets of the trust to the beneficiary—are the trust agreement.
A common trust that I draft for a client is a bloodline trust in a Will for the benefit of the client’s children. Each child has a trust under the Will for his benefit. Typically, the child is the trustee of his own trust. The child is the lifetime beneficiary of the trust, and after the child dies, the remaining principal and income passes to the child’s children (my client’s grandchildren) and a successor trustee is named in the Will to assume the responsibilities of being a trustee.
For instance, the Will might contain language that says, “I give my entire estate to my two children, with half passing to my son and half passing to my daughter. Each child’s share shall be held in trust for the benefit of the child and after the child dies, the remaining principal and income passes to that child’s descendants. My son shall serve as trustee of his trust and if my son is unable to serve, my daughter shall serve as successor trustee of my son’s trust.” These words in the Will are the trust agreement. The benefits of creating a trust are many.
When you leave money to your son in a trust, the money is not affected by your son’s potential credit issues. So, for instance, if your son has debts, his creditors cannot reach the money in the trust. When your son dies, the money remaining in the trust won’t pass to his spouse, instead the money will pass to your grandchildren, meaning the money stays within the bloodline.
So, what is the cost of maintaining this sort of trust? As I said, not much. Typically, a trustee can charge a commission on an annual basis, which is a certain percentage of the principal of the trust and a certain percentage of the income the trust earns. The statutory fees are fairly reasonable; however, if your son is his own trustee, then he probably isn’t going to charge himself a commission.
I know of no extra cost that financial institutions charge simply because an account is titled as a trust account. An account you own at a bank or brokerage house would be titled “John Smith.” A trust account that John Smith owns at a bank or brokerage house would be titled “John Smith, Trustee.” There is no difference between the two accounts other than the manner in which the accounts are titled. The trustee is free to invest in manner in which he could invest individually.
A trustee is subject to certain duties; the trustee must invest the assets of the trust prudently and he could be held liable if he doesn’t. But if John Smith is the trustee and the beneficiary, who is going to hold him responsible for his actions? John’s children have an interest in the trust, but it’s only a future interest and John is the beneficiary during his life.
About the only expense I can see with such a trust would be the obligation to file a trust income tax return each year. The trustee could do this himself, but if he had to hire an accountant to prepare and file the return that could be classified as a maintenance fee, small as it would be.
So the bottom line is, any cost associated with a trust is vastly outweighed by the benefits of a trust. Don’t let the perceived cost of maintaining a trust get in the way of your creating a trust.