Legacy trusts: Generational estate planning but with a cost

1. Legal fees. Establishing a legacy trust requires the expertise of estate planning attorneys. The legal fees for creating a trust document can vary widely depending on the complexity of the trust and the attorney's experience. On average, initial legal fees can range from $5,000 to $20,000 or more. These fees cover drafting the trust agreement, advising on trust structure, and ensuring compliance with state and federal laws.
2. Consultant fees. In addition to legal fees, families often engage financial professionals, tax professionals and/or trust consultants to design a comprehensive estate plan. These professional consultants provide insights into asset allocation, tax strategies and long-term financial planning. Their fees can add another $2,000 to $10,000 to the initial setup cost, depending on the scope of their involvement.
3. Trustee fees. Choosing a trustee is a critical step in establishing a legacy trust. Trustees can be family members, professionals or corporate entities. Professional and corporate trustees typically charge a setup fee ranging from $1,000 to $5,000. This fee covers the initial assessment and onboarding processes. Specifically for legacy trusts, it is recommended that a professional or corporate trustee is hired to disregard any future claims of impropriety by family members.

1. Annual trustee fees. As mentioned, it is advisable to name a professional or corporate trustee to manage the trust’s assets, ensuring compliance with the trust terms, and making distributions to beneficiaries. Regardless, we recommend trustees for legacy trusts charge fees for their services. These fees usually take the form of annual fees, which are usually a percentage of the trust's assets. This fee typically ranges from 0.5% to 2% of the trust's total assets. For example, if a trust holds $10 million in assets, the annual trustee fee could be between $50,000 and $200,000.
2. Investment management fees. Most estates that pursue legacy trusts often include diversified investment portfolios managed by professional investment advisors. Investment management fees are generally calculated as a percentage of assets under management (AUM) and can range from 0.25% to 1% annually. If the trust’s assets amount to $10 million, the investment management fees could be between $25,000 and $100,000 per year.
3. Tax preparation and filing fees. Legacy trusts are required to file annual tax returns, and the complexity of these returns often necessitates the services of a tax professional. The cost for tax preparation and filing can vary based on the complexity of the trust's assets and transactions. On average, these fees can range from $1,000 to $5,000 annually or higher depending on the complexity of the trust assets.

1. Accounting and record-keeping. Accurate record-keeping and accounting are crucial for the proper administration of a legacy trust. The costs for these services depend on the trust's complexity and the volume of transactions. Annual accounting fees can range from $2,000 to $10,000.
2. Compliance and legal costs. Trusts must comply with changing laws and regulations, which may necessitate periodic legal reviews and updates to the trust document. Legal fees for review and update services can add another $1,000 to $5,000 annually.
3. Miscellaneous administrative costs. Other administrative expenses can include postage, courier services, office supplies and other miscellaneous costs associated with managing the trust. These costs, although relatively minor, can add up over time and typically range from $500 to $2,000 annually.

1. Loss of liquidity. One often overlooked cost of legacy trusts is the potential loss of liquidity. Assets placed in a trust are no longer readily accessible to the grantor, which can be a significant opportunity cost. This loss of liquidity means that the grantor cannot use these assets for personal needs or investments without triggering tax consequences or violating the terms of the trust.
2. Potential lower returns. The conservative investment strategies often employed by trusts to preserve capital and generate steady income may result in lower returns compared to more aggressive investment approaches. This conservative approach can be seen as an opportunity cost, especially in bullish market conditions.

While legacy trusts offer significant benefits in terms of tax savings, asset protection and long-term wealth preservation, the costs associated with them can be substantial. Families considering legacy trusts must weigh these costs against the potential benefits and work closely with legal, financial and tax professionals to ensure that the trust structure aligns with their overall estate planning goals.

With startup costs, on average, ranging from $8,000 to $35,000 and annual costs of administration ranging from 0.75% to 3% of total assets value of the trust, understanding the full spectrum of costs is essential for making informed decisions about legacy trusts. By doing so, families can better navigate the complexities of these trusts and maximize the benefits for future generations.

To ensure the optimal structure and administration of a legacy trust, families should engage with experienced legal, financial and tax professionals. By thoroughly understanding and planning for the associated costs, families can create a legacy trust that effectively supports their long-term estate planning goals.

The author is an attorney with The Cannon Law Firm. He can be contacted via thecannonlaw.com.