Trust Fund Management Fees

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.

Key Takeaways

  • A trust fund is a legal entity that holds money or property on behalf of a person or organization, to be distributed after their death or when they are no longer capable mentally of managing the holdings.
  • Trust funds consist of a grantor, a trustee in charge of managing the trust, and a beneficiary of the trust.
  • Fees include asset management, annual expense ratios, and sales loads, (when mutual funds are part of the trust), brokerage commissions, and trading expenses.

Types of 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. Mutual funds that are actively managed attract higher fees than index funds. The annual expense ratio is usually between 0.5% and 1% of the invested assets.

Additional Fees

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 Security and Exchange Commission (SEC) does not put a limit on what sales load funds can charge, but the Financial Industry Regulatory Authority (FINRA) does. FINRA caps the cost at 8.5%, although the percentage is lower if other fees are charged. 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 specialty 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.

Article Sources
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  1. U.S Securities and Exchange Commission. "Mutual Fund Fees and Expenses."

  2. FINRA. "Rules & Guidance - 2341. Investment Company Securities."

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