A trust fund is a legal entity established to hold property or other assets for another person or organization. It is typically regarded as an estate planning tool that sets specific terms on how the assets are to be held and then distributed in the future. Trusts provide legal protection from creditors, tax benefits, and protection.
A trust fund is typically set up by an individual for distribution after their death or for when they will no longer be mentally capable of managing the assets. The three main parties of a trust fund are the grantor, the trustee that manages the trust, and the beneficiary.
Trust Fund Management Fees
There are many different types of trust funds and therefore different types of fees and cost amounts associated with setting up and managing a trust fund. A management fee is one of the most common fees associated with a trust fund.
The asset management fee is a straightforward fee charged on a trust fund. It is expressed as a fixed percentage of the total assets being managed. The rate differs from fund to fund and is inclusive of other small costs incurred when managing the trust fund. Some advisers charge a flat fee, while others charge a commission per transaction. If the assets invested are riskier, the annual asset management fee is higher. The fee takes into account tax harvesting, rebalancing, and re-examination of your portfolio.
Annual Expense Ratio
If the trust fund is invested in mutual funds, you are charged the fund annual expense ratio. This fee covers the fixed and ongoing expenses that encompass running the fund. Such expenses include the fund's manager salaries, printing costs, the cost of marketing materials, and the cost of hiring customer service representatives. Active mutual funds attract higher fees than the index funds. The annual expense ratio is usually 0.14%-1% of the invested assets.
You are also required to pay fees for brokerage commissions and trading expenses that are typical of any trading account. In addition, the funds also pay stamp duty tax. For mutual funds, these miscellaneous fees are much lower than what an adviser would charge.
There is also a fee, called a load, charged in order to compensate the salesperson who sold you the trust fund. The cost of loads at the time of purchase is 5%. You may also be required to pay a deferred sales charge if you sell the fund within a particular time frame. The charge is usually 6%, falling to 0% by the seventh year. If you do not sell the fund within seven years, you do not pay the fee.
Other additional fees can include income collection fees from real estate in the trust, fees related to the management of insurance policies, extraordinary or unusual services fees related to services performed out of the norm, and fees on the management of speciality assets.
The Bottom Line
A trust is a great way to manage and distribute your assets when you are no longer capable of doing so. It comes with many benefits but also with a variety of fees, primarily associated with the management of the trust. It's important to understand the various management fees and if setting up the trust is worth the cost incurred.