Can I Limit Trustee Fee to a Small Amount for a Large Trust?
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Question:
I’m going have a spendthrift type of trust drawn up for my son who will probably inherit $6-7 million dollars. The instructions would be to invest the money in an S&P 500 index fund with an annual $100,000 payment to him. I think a $35-70,000 annual trustee fee would be exhorbitant. How about an annual $10,000 fee?
Response:
You’re right, that the standard fee for a trust of that size would be between $35,000 and $70,000. Most trustees discount their standard 1.0% annual fee for larger trusts and sometimes they’ll agree to a negotiated fee below their standard fee schedule. But I’d be surprised if you could get anyone to agree to less than the bottom of the range even though you would be simplifying their duties by dictating both the investments and distributions. They would still be taking on full responsibility and liability for the trust. They would be responsible for trust tax returns and interacting with your son, even if on a very limited basis.
Some other things you might want to consider: What if your son really needs more than $100,000 at some point? For instance he may face health care costs or become disabled and need long-term care. Or he may have to pay legal fees in the event of divorce, bankruptcy, a lawsuit or criminal action. Or what if he becomes incapacitated and it doesn’t make sense to distribute the funds directly to him and they should instead be used on his behalf? Finally, $100,000 in 50 years won’t be worth nearly as much as it is today. At the same time, the trust fund may be much larger in the future. While $100,000 is 2% of a $5 million trust fund, it’s only 0.5% of a $20 million fund. You may want the distribution to increase with inflation or to be a percentage of the trust fund rather than a fixed amount. For instance, you may want 2% to be distributed each year; but then again you might not want that, since you might not want $400,000 to be distributed if the trust fund reaches $20 million, or only $50,000 if the we experience a crash and the trust loses half its value. Unfortunately, we can’t always predict or control the future.
All of these are reasons to give the trustee some discretion and allow it to earn its fee.
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