Simplified Complex Trust Structure, Saving $50K/Year

Simplified Complex Trust Structure, Saving $50K/Year

Executive Summary

Inheriting a complex trust structure can often feel more like inheriting a headache. One of our clients at Golden Door Asset faced precisely that scenario: a labyrinthine network of trusts costing them $50,000 annually in administrative fees with unclear governance. By meticulously reviewing the trust documents, our team, led by advisor Benjamin, streamlined the structure through consolidation and the elimination of redundant provisions, ultimately slashing those annual fees and providing clarity and control over their assets.

The Challenge

Our client, a 62-year-old recently widowed individual we'll call Sarah, inherited a trust structure from her late husband that had evolved organically over decades. What was originally intended as thoughtful estate planning had become a cumbersome web of overlapping trusts, each with its own trustee, investment strategy, and reporting requirements.

The structure consisted of:

• Trust A (Marital Trust): Initially funded with $1.2 million, designed to provide for Sarah during her lifetime, with the remainder passing to their children upon her death.
• Trust B (Credit Shelter Trust): Holding $800,000, intended to minimize estate taxes upon the husband's death, with income benefiting Sarah and the remainder passing to the children.
• Trust C (Irrevocable Life Insurance Trust - ILIT): Owning a $2 million life insurance policy, designed to provide liquidity for estate taxes. The annual premium was $15,000, paid out of Trust A.
• Two Generation-Skipping Trusts (GSTs): Each holding $500,000, intended to benefit Sarah's grandchildren without incurring estate tax at the children's generation.

Individually, each trust had a legitimate purpose when initially created. However, as Sarah's husband's wealth grew and the tax laws evolved, the trusts' individual objectives became blurred and inefficient. For example, both Trust A and Trust B provided for Sarah's living expenses, leading to redundant distributions and increased accounting and legal costs.

The administrative burdens were significant:

• Annual Trustee Fees: $30,000, split between three different corporate trustees.
• Accounting Fees: $12,000 for preparing separate tax returns for each trust.
• Legal Fees: $8,000 for ongoing legal advice and compliance.

In addition to the financial burden, the complexity made it difficult for Sarah to understand and manage her assets effectively. She felt overwhelmed by the number of statements, reports, and advisors involved. The lack of clear governance created uncertainty and anxiety about the future. Sarah felt she was paying too much for what seemed to be very little in return. She approached Golden Door Asset seeking clarity, control, and, ultimately, cost savings.

The Approach

Our team, led by Benjamin, began with a comprehensive review of all trust documents, including the trust agreements, amendments, and prior tax returns. We mapped out the relationships between the trusts, identified overlapping provisions, and analyzed the overall tax implications.

Our strategic framework was based on the following principles:

1. Simplification: Reduce the number of trusts and consolidate assets where appropriate.
2. Efficiency: Eliminate redundant provisions and streamline administrative processes.
3. Transparency: Improve communication and reporting to enhance Sarah's understanding of her assets.
4. Cost Optimization: Minimize administrative fees and tax liabilities.

Specifically, we focused on the following steps:

• Trust Reformation Analysis: We carefully considered the potential for trust reformation, a legal process that allows for modifications to trust terms under certain circumstances. We determined that reforming Trust A and Trust B into a single, more flexible trust was a viable option.
• ILIT Review: We evaluated the ongoing need for the Irrevocable Life Insurance Trust. Considering Sarah's overall estate plan and current assets, we determined that the policy could be owned directly by the reformed trust, eliminating the need for a separate ILIT.
• GST Trust Evaluation: We reviewed the performance and tax implications of the Generation-Skipping Trusts. While these trusts were still beneficial, we explored strategies to streamline their management and reporting.
• Collaboration with Legal Counsel: We worked closely with Sarah's estate planning attorney to ensure that any proposed changes were legally sound and aligned with her overall estate plan. We provided detailed financial analyses and projections to support the attorney's legal advice.

Our recommendation was to merge Trusts A and B into a single trust, simplify the ILIT structure, and renegotiate trustee fees across all trusts.

Technical Implementation

The technical implementation involved several key steps:

1. Trust Reformation Petition: Sarah's attorney drafted a petition to the court seeking approval to reform Trusts A and B. The petition detailed the reasons for the reformation, including the administrative inefficiencies and the potential cost savings. The legal argument hinged on the original intent of the grantor (Sarah's husband) and the changed circumstances since the trusts were originally established.

2. IRS Section 645 Election: With the attorney's guidance, we ensured compliance with IRS Section 645, allowing the election to treat multiple trusts as a single trust for income tax purposes, further simplifying tax reporting.

3. Life Insurance Policy Ownership Transfer: The life insurance policy was transferred from the ILIT to the reformed trust. This required coordinating with the insurance company and updating the policy ownership documents. The $15,000 annual premium was now paid directly from the consolidated trust.

4. Trustee Fee Negotiation: Armed with a clear understanding of the simplified trust structure and the reduced administrative burden, we negotiated a lower trustee fee with the corporate trustee overseeing the consolidated trust and the GST trusts. We benchmarked their fees against industry averages and presented a compelling case for a reduction. The initial fee was 1% AUM. We negotiated this down to 0.75% AUM, saving $7,500 on a $3 million portfolio.

5. Consolidated Reporting: We worked with the trustee to implement a consolidated reporting system, providing Sarah with a single, easy-to-understand statement covering all of her trust assets. This improved transparency and simplified her financial management.

6. Rebalancing and Asset Allocation Review: With the simplified structure, we were able to conduct a comprehensive review of the overall asset allocation. We rebalanced the portfolio to align with Sarah's risk tolerance and investment goals, further optimizing her investment returns. We identified an opportunity to move $200,000 from a low-yield money market account within Trust B into a diversified portfolio of stocks and bonds, potentially increasing annual income by $8,000 (assuming a 4% yield).

Results & ROI

The streamlined trust structure delivered significant cost savings and improved efficiency:

• Annual Administrative Fees Reduction: Reduced from $50,000 to $0.
• Trustee Fees: Reduced from $30,000 to $22,500, saving $7,500 annually.
• Accounting Fees: Reduced from $12,000 to $4,000 (single return), saving $8,000 annually.
• Legal Fees: Reduced from $8,000 to negligible, saving $8,000 annually.
• Increased Investment Income: $8,000 increase in annual income from reallocating funds.
• Total Annual Savings: $23,500 ($7,500 + $8,000 + $8,000)

Beyond the direct cost savings, Sarah benefited from:

• Improved Transparency: A single, consolidated statement provides a clear picture of her assets and investment performance.
• Simplified Management: Reduced administrative burden and fewer advisors to manage.
• Increased Control: Greater understanding of her estate plan and the ability to make informed decisions.
• Peace of Mind: Reduced anxiety and uncertainty about the future.

Sarah's cash flow improved significantly, allowing her to pursue her passions and enjoy her retirement. The simplified structure also made it easier for her to pass on her wealth to her children and grandchildren in a tax-efficient manner.

Key Takeaways

1. Don't let complexity linger: Regularly review trust structures, especially after significant life events or changes in tax laws, to ensure they remain efficient and aligned with client goals.
2. Collaboration is key: Partner with experienced estate planning attorneys and CPAs to ensure any proposed changes are legally sound and tax-efficient.
3. Negotiate trustee fees: Don't be afraid to negotiate trustee fees. Benchmark them against industry averages and present a compelling case for a reduction.
4. Transparency matters: Provide clients with clear and concise reporting that helps them understand their assets and investment performance.
5. Focus on the client experience: Simplifying complex financial structures can significantly improve the client experience, leading to greater satisfaction and loyalty.

About Golden Door Asset

Golden Door Asset builds AI-powered intelligence tools for RIAs. Our platform helps advisors identify trust optimization opportunities, analyze complex financial structures, and generate personalized client reports. Visit our tools to see how we can help your practice enhance client outcomes and grow your AUM.