Understanding the Impact of Fees on a Special Needs Trust or Settlement Protection Trust

Overview

Trusts are financial vehicles that can provide numerous benefits, including asset protection, protecting government benefits, tax advantages, and controlling the distribution of the trust’s assets. However, one often overlooked aspect of trust management is the impact of trustee fees on the overall value of the trust. While trustee fees are important for all trusts, the impact of fees is especially relevant for Special Needs Trusts (“SNTs”) and Settlement Protection Trusts (“SPTs”).

What Are Trustee Fees?

Trustee fees are costs associated with the administration and management of a trust. These costs can range from standard administrative operations to more complex financial tasks, and they can significantly impact the overall value of the trust over time.

Trustee fees are a necessary cost of conducting trust operations. However, if not properly managed, these fees can significantly eat into the value of the trust.

Note: An attorney has an ethical duty to ensure that he or she is always acting in the best interest of its client(s). This duty applies to the safeguarding of clients’ assets and other property, and by extension, an attorney must ensure trustee fees for a trust holding any client assets are reasonably commensurate. As such, best practice would necessitate having documentation that demonstrates that comparative due diligence was exercised by an attorney before the execution of any trust instrument. This position is bolstered by various courts’ recent application of fiduciary duties to individuals and circumstances to which such duties have not traditionally applied.

Why Do Trustee Fees Matter?

Trustee fees might seem minor at first, but over time they, can significantly reduce the value of the trust. These costs are typically deducted directly from the trust’s assets, reducing the funds available for distribution to beneficiaries.

The impact of trustee fees is especially significant in the case of ongoing trusts that operate over several decades. In such cases, even small fees can compound over time, substantially reducing the trust’s value.

The long-term impact of trustee fees on a trust’s value underscores the importance of understanding and managing these costs.

Transparency

Not all trustees are equally transparent regarding fees; in particular, trustees that charge primarily on a time and billing basis have an open road to impose fees that may be more than the grantor would have agreed to had the total amount been fully disclosed. Time-based billing should be limited to “extraordinary” events and not part of ordinary trust administration.

The trustees’ fees should be fully transparent and detailed within the trust documents.

Also, so-called “Pooled Trusts” often fail to fully disclose all fees, particularly the fees associated with the investment pool.

Unlike licensed fiduciaries, Pooled Trusts are unregulated and have no supervising government agency that oversees or examines their activities. Unregulated financial entities expose clients to a greater risk of financial loss.

How Are Trustee Fees Calculated?

The calculation of trustee fees can vary depending on the specifics of the trust and the jurisdiction in which it operates. Some trustees may charge a flat fee for their services, while others may charge a percentage of the trust’s assets. Other trustees have fixed or base annual fees, dramatically increasing the effective fee rate over time as the trust holds fewer assets.

Sometimes, the trust document itself may specify the trustee’s compensation. However, if the trust document does not guide this matter, you may have little recourse to limit fees as the trustee is typically entitled to “reasonable compensation” for their services.

Determining what constitutes “reasonable compensation” can be a complex matter, and it often involves consideration of several factors that typically require a court to resolve, including:

• The size and complexity of the trust;
  
• The amount of work involved in administering the trust;
  
• The trustee’s level of expertise and experience; and
  
• Local standards for trustee compensation.
  

Accordingly, the best practice is always to require a fully disclosed and incorporated fee schedule within the trust documents.

Trustee Fees: A Case Study

Consider a trust with a stable value of $1,500,000. If the trustee charges a fee of 1.46% annually (the national average trustee fee according to some sources) the fees would amount to $14,600 annually. Over 20 years, these fees would total $292,000 – or almost 19.5% of the trust’s initial value.

Furthermore, this calculation does not consider the opportunity cost of these fees. In other words, if not consumed in fees and invested, the funds used to pay trustee fees would generate additional returns for the trust.

By comparison, a trustee fee of 0.65% would save $195,000 over 20 years and reduce the effective trustee fee rate even further with the added investment gains.

This example illustrates the potential impact of trustee fees on a trust’s value and the importance of carefully considering these costs when setting up and managing a trust.

Strategies for Managing Trustee Fees

Given the potential impact of trustee fees on a trust’s value, attorneys, trustees, and beneficiaries must manage these costs actively. Here are some strategies that can help:

• Negotiate trustee fees: Just like any other professional service, the fees charged by trustees are often negotiable. Don’t be afraid to discuss trustee fees and negotiate a fair and reasonable rate, given the trust’s complexity and size.
  
• Shop around: Before selecting a trustee, comparing fees and services offered by different trustees can be beneficial. Thus, comparing trustee fees can help you find a trustee offering the best service value.
  
• Consider a corporate trustee: While they may charge higher fees, they often offer higher expertise and can handle more complex tasks, potentially saving money in the long run.
  
• Select a Trustee who is a technology leader: A trustee who utilizes modern software and technology can automate many administrative tasks, reducing the time and effort required to manage a trust and potentially lowering trustee fees.
  

Conclusion

While trustee fees are a necessary part of trust administration, they can significantly impact the overall value of a trust if not properly managed. By understanding the trustee fees and implementing strategies to address these costs, trustees and beneficiaries can help ensure that trusts continue to serve their intended purpose without being unduly eroded by fees.

The importance of careful management of trustee fees underscores the value of professional advice in trust administration. Whether you are a trustee or a beneficiary, working with an experienced team of professionals can help navigate the complexities of trust administration and ensure the trust is efficiently and cost-effectively managed.

Additional Information

For more detailed information on trustee fees and how they can impact a trust, visit www.easternpointtrust.com. We can provide solutions tailored to your situation and fully transparent information about trust administration.

Finally, remember that trust administration is a complex process that requires attention to detail, a strong understanding of financial and legal concepts, and a commitment to acting in the best interests of the trust’s beneficiaries. By educating yourself about the process and seeking professional advice when needed, you can help ensure that your trust serves its intended purpose and provides for your loved ones in the most effective manner possible.

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